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“1 + 1 = 1” say HMRC

28th Nov 2016
VAT Consultant
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I was very concerned to read HMRC’s argument in relation to the valuation of capital items in the Water Property Ltd (WPL) FTT case. Their argument required “aggregation of the costs of acquisition and development,” such that they were “part of a single indivisible project and thus constituted a single ‘relevant capital item’.” I was pleased to read that the Tribunal insisted that “there cannot be a requirement to aggregate.”

Basic Facts

WPL acquired a redundant public house for £210,000 plus £37,500 VAT. Doubtless part of the property had been a dwelling.

WPL opted to tax, and then developed part of the property as a daycare nursery, to be let to an associated company which would run the nursery. These works were valued at approx. £210,000 including VAT. Once the nursery was complete, WPL entered a separate contract for approx. £160,000 including VAT to develop residential flats.

HMRC argued that the development of the daycare centre triggered anti-avoidance legislation which would have negated the Option to Tax, and therefore prevented recovery of input tax. The legislation provides that where a developer opts to tax, and the property is to be used for exempt purposes and be a capital item, then the option has no effect. See Sch 10, para 13. If the property is not a capital item, the anti-avoidance rule is not triggered.

There was no doubt that the property had ‘exempt use,’ as it would be used as a nursery.

The issue was that HMRC contended that the property was a capital item. Although both purchase price and the cost of refurbishment were separately less than £250,000, the aggregate was in excess of that amount.

The taxpayer sought professional advice on the project; and they insisted that they had no ‘avoidance’ motive; indeed, VAT charged on the lease to the nursery was irrecoverable. This amounted to nearly £5,000 p.a.

The Tribunal carefully worked through the Capital Goods Scheme legislation (VAT Regulations 112-116). Paras 48-50 of the decision asks whether the Regulations allow different expenditure to be aggregated, and concluded that it does not.

The Tribunal also commented that European Law providing for the CGS allows for VAT to be spread over a number of years, and that is exactly the outcome in this case.

The Tribunal also commented on published HMRC guidance (706/2, para 4.12) addressing the issue of phased developments. Although careful not to treat this as statutory, the Tribunal agreed that it was a fair interpretation of the legislation.

We were surprised that this case came before the Tribunal at all.”

The decision is here:


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