Property development and the art of VAT
Marie Stein reviews the complex VAT issues the Glasgow School of Art faced when it demolished and reconstructed properties on its college campus.
Between 2011 and 2014, the Glasgow School of Art (GSA) carried out the demolition of two of its buildings, the redevelopment of its Assembly Building and the construction of a new building. The Assembly Building was then let to the student union for a low rent.
The design of the new building for the GSA was somewhat unusual. The construction was almost wrapped around the existing Students' Union property, with a connecting door between the new and existing parts.
GSA claimed input VAT on the Assembly Building works on the basis that as it was rented out, it was being used for wholly taxable purposes. HMRC objected, and the case went to first tier tribunal (FTT).
The numerous VAT issues covered several complex, technical points:
- whether the work created one or two buildings;
- whether there was a single or two separate supplies of services; and
- whether the rent payments made by an occupant constituted consideration for a taxable supply.
The FTT refused the GSA’s appeal, so the art school appealed to the UT, which upheld every aspect of the FTT's decision (Glasgow School of Art v HMRC  UKUT 0173).
While the facts in this case were very detailed, the main issue concerned basic VAT recovery principles. The GSA argued that the costs were directly attributable to taxable supplies made by the GSA under the lease arrangements with the occupant, the Student Union. Therefore, the GSA was entitled to claim all of the VAT.
HMRC's position was that the costs were "residual" because the work was an extension of an existing property, which was used for making both taxable and exempt supplies, as well as certain non-business activities. Therefore, the GSA could only claim a proportion of the VAT.
Comment on the ruling
I must give credit to the author of the UT's decision. It has to rank as one of the most well-balanced, considered and well-written decisions I have ever read. It is an excellent summary of the technical issues involved and should be included as necessary reading for VAT consultants, accountants and property developers.
What about the VAT advice?
One of the interesting factors of this case was the advice from VAT consultants when HMRC queried GSA's initial VAT claim in 2014.
At the time of HMRC's original ruling, the contractor had issued combined VAT invoices for all aspects of the work, including work on both buildings. These invoices were, apparently, issued under the terms of the original contract, which treated work on both parts of the development as a single project. This was HMRC's basis for arguing that the work constituted a single supply of services on a single property.
After taking advice on the matter, the GSA asked the contractor to issue credit notes for the original invoices and issue new invoices for the work done on each part of the property. The intention was to support the premise that the work consisted of two separate supplies of construction services relating to two separate buildings.
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In the circumstances, this was probably the most appropriate approach that could be done in the form of damage control. However, there was no detailed information about the contract itself in the UT's decision, so we can't be sure whether the terms of the contract were reflected in the original or revised VAT invoicing arrangements. Either way, the revised invoicing didn't affect HMRC's view of the situation, nor did it persuade the FTT or UT to uphold the GSA's appeal.
VAT issues for property developments
This was a complex project for the GSA, taking several years to plan and involving input from many different organisations, both public and private. However, it seems that very little time was spent considering the VAT issues in advance.
As a result, the GSA has been left with a significant and unanticipated VAT bill, as well as professional costs, legal costs and management time to appeal HMRC's ruling. A very expensive and unexpected exercise.