Pub chain Enterprise Inns lost an upper tier tribunal appeal that will curb its ability to reclaim input VAT on property-related overhead costs.
The VAT defeat for the appellants in Enterprise Inns & Unique Pub Properties UKUT 240(TCC) came out just a few weeks before Enterprise released a trading statement detailing its efforts to mitigate continuing difficulties in the pub sector by offloading nearly 220 of its less profitable pubs and extraneous properties.
The trading statement was cautiously optimistic and well received by investors, but the tribunal’s refusal to allow the company to combine the private residential areas of its pubs with the wider business premises for VAT purposes will act as a further drag on the company’s efforts to improve profitability.
The amount of rent attributed to residential accommodation has a bearing on how far landlords can recover input tax, Mr Justice Newry explained in his decision, which is why Enterprise and Unique Pub Properties wanted to be able to recover VAT on all of their property-related and overhead costs.
The pub companies challenged the 90:10 apportionment in April 2008 and claimed that all the rent should be subject to VAT, as the rent for each pub was based solely on the profit that it could generate. The residential accommodation was provided free of charge. HMRC refused and the pub companies lost their case at the first tier tribunal.
Advised by Ernst & Young, the companies appealed to the upper tribunal, but failed to convince the judge to overturn the lower tribunal decision.
If the pubs were planning to invest a significant amount in refurbishing their estates, there could be a significant VAT knock-on from having to exempt 10% of their input tax costs, said Les Howard of vatadvice.org.
At the beginning of August, Enterprise Inns issued an interim management statement demonstrating incremental improvements in its cash position and profitability, which was up 1.6% within its “substantive” estate, with like-for-like income down by 1.2%.
Bank borrowings net of cash were reduced by £82m from 30 September 2011 to £364m, partly on the back of proceeds from disposals, which included the sale of 121 unsustainable pubs (£26m), a sale-and-leaseback of 17 pubs (£24m) and 82 exceptional properties (£98m).
While trimming back to its most profitable properties, the company said it would continue to invest in the quality of its estate to “maintain the competitive advantage offered by high quality pubs, enhancing sustainable income streams for the long term”. Around £60m in capital expenditure will be invested over the course of the full financial year.
The company was approached for its assessment of the upper tribunal decision on its refurbishment programme and overall profitability, but declined to comment.