HMRC NEWS
Buildings and Construction (VAT notice 708)
The above guidance sets out how to work out the VAT on building work and materials if you are a contractor, subcontractor or developer. HMRC has now updated sections 13.8.1 and 13.9 to clarify that electrical blinds are not ordinarily incorporated in dwellings.
Energy-saving materials and heating equipment (VAT notice 708/6)
The above guidance can be used to find out how to account for VAT if you’re a contractor or subcontractor installing energy-saving materials and grant-funded heating equipment. Guidance on the time-limited zero rate of VAT for installations of energy-saving materials installed in residential accommodation in Northern Ireland, with effect from 1 May 2023, has been added.
VAT Registration helpline
From 22 May 2023, HMRC have closed the VAT registration helpline. This line was assisting taxpayers with VAT registration applications; however, HMRC have confirmed that over 85% of the calls were from taxpayers seeking an update on the progress of their VAT registration application. Taxpayers can now make use of the ‘Where’s my reply’ tool rather than making phone calls, allowing HMRC to allocate resources more efficiently and process more applications. Taxpayers should expect a reply to VAT registration applications within 40 working days.
CASE REVIEW
Supreme Court
1. Disapplication of the option to tax
A dispute arose between Mr Moulsdale and HMRC as to whether VAT should have been charged on the sale of a property, which was owned by Mr Moulsdale and leased to one of his Optical Express Companies, to an unconnected third party purchaser (Cumbernauld SPV Ltd). The issue was whether Mr Moulsdale should disapply his option to tax when selling the property to Cumbernauld.
Broadly, if Mr Moulsdale intended or expected Cumbernauld to incur VAT and have possession of a Capital Goods Scheme (CGS) item then the disapplication rules would apply and Mr Moulsdale should not have charged VAT. On the other hand, if Mr Moulsdale did not intend or expect Cumbernauld to incur VAT and have possession of a CGS item then VAT would be due on the sale as a result of the option to tax made by Mr Moulsdale. It was therefore for the court to address this circularity within the option to tax provisions.
The Supreme Court took the view that the question of whether Cumbernauld incurred VAT or not, and therefore had a CGS item, should be determined by reference to other expenditure on the property, rather than merely on the cost of purchasing the property from Mr Moulsdale. The test does not turn on the transaction itself but what Mr Moulsdale intended or expected would happen in respect of the land in the hands of Cumbernauld and whether it would incur VAT bearing capital expenditure.
Cumbernauld had no intention of incurring any further capital expenditure on the property and therefore, the option to tax was not disapplied. As a result, Mr Moulsdale should have charged VAT on the sale, the appeal was dismissed.
Constable comment: This was a complex case involving the option to tax anti-avoidance provisions. The court recognised at the start that “drafting tax legislation is a difficult and complex task so it is not surprising that sometimes the legislation does not quite work. It is common ground that this appeal arises because of one such occasion.”
Court of Appeal
2. Supplies of insulation or roof panels?
This case concerned an appeal by Greenspace (UK) Limited (GUL) against the decision of the Upper Tribunal (UT) to dismiss GUL’s appeal against VAT assessments raised by HMRC totalling £2,581,092. The issue in this case is whether installation of the roof panels which GUL is supplying falls under the reduced rate of VAT applicable to the installation of energy saving materials.
GUL argued that the issue is whether the supply is of insulation for a roof or something more extensive, namely the installation of the roof itself. GUL also argued that its supplies were properly characterised as a means of providing insulation for roofs as the predominant feature of the product being supplied was the Styrofoam insulation.
HMRC argued that both the FTT and the UT had correctly concluded that the appellant’s supplies were of a roof and not insulation. Even though 95% of the volume of the product consisted of insulating material, there needed to be a pre-existing roof for the appellant to succeed in its argument. However, in this case there was no pre-existing roof to which the insulating panels were applied because the panels themselves formed the roof.
Both GUL and HMRC agreed that the supplies in issue in this case amounted to a single supply which comprised the panels and their insulation. However, the appeal was dismissed as the reduced rate of VAT does not apply to supplies of roof panels by the appellant because the supply is of a roof and is not of insulation for roofs.
Constable Comment: This case highlights the importance of correctly identifying the nature of a supply and then applying the correct rate of VAT. GUL owes HMRC a substantial amount of VAT as a result of incorrectly classifying the nature of its supplies. The VAT law surrounding the supply of insulation and other energy saving materials can be complex and it would be advisable to seek professional advice where there is any doubt.
FTT
3. Construction of a building for relevant charitable purposes
Between June 2017 and June 2019, the Zoological Society of Hertfordshire (“ZSH”) engaged the appellant, Paradise Wildlife Park limited (“PWP”), to construct a lion enclosure, an outside exhibition called the “World of Dinosaurs” and a shop called the “Dino Store” at Paradise Wildlife Park (the “park”). PWP zero-rated this work on the basis that its supplies were of constructing a building intended for use solely for a relevant charitable purpose.
HMRC disagreed and raised an assessment for £411,641, the amount of VAT at the standard rate on PWP’s construction services. PWP agreed that the work relating to the Dino Store should be standard rated and the appeal concerned the work to construct the lion enclosure and the World of Dinosaurs Exhibition.
The Tribunal considered two questions. The main question was whether PWP was constructing buildings designed solely for a relevant charitable purpose, which turned largely on whether ZSH is carrying on a business and, if it is, whether these buildings are used to some extent in that business. There secondary issue was whether the “World of Dinosaurs”, which is an outside exhibition, is a building.
The Tribunal dismissed the appeal finding that:
- ZSH is carrying on a business of operating and charging for admission to the park;
- The lions’ enclosure and the World of Dinosaurs were intended for use at least in part for the purposes of that business; and
- The World of Dinosaurs is not a building.
As a result, it was concluded that the services PWP supplied in the construction of the lions’ enclosure and the World of Dinosaurs were not supplies in the course of construction of a building intended for use solely for a relevant charitable purpose within Item 2(a) of Group 5, Schedule 8 VATA 1994 and as such could not be zero-rated.
Constable Comment: This case considers the question of when a charity is carrying on ‘business’ activities in some detail and may be useful for other charities considering construction work. The rules surrounding business and non-business activities are complex and a decision can have a significant outcome on the VAT liability of construction work in particular. Therefore, it is essential that the correct decision is made prior to any construction works being carried out.
4. Validity of option to tax
This case concerned the validity of an option to tax (OTT) made by Rolldeen Estates Ltd (REL) in respect of the Jubilee Business Centre (the Centre). REL opted to tax the Centre in February 2008 and consequently recovered input VAT incurred on repairs and maintenance of the building. The Centre was sold in 2015 but REL did not charge VAT. HMRC raised assessments for £50,000 relating to REL’s failure to charge VAT on the sale of the opted property.
REL argued that it made VAT exempt supplies of leases of the Centre prior to making the OTT and therefore HMRC’s permission was required to opt to tax. No permission was requested or granted. REL argued that as a result the OTT was not effective and VAT was not due on the sale.
HMRC relied on the provisions in the VAT Act 1994 at Schedule 10, paragraph 30, which allow HMRC to retrospectively dispense with the permission requirements and treat a ‘purported option as if it had been validly exercised’.
The first issue before the FTT was whether REL had the right to appeal against HMRC’s decision to rely on paragraph 30. Whilst both REL and HMRC took the view there was a right to appeal, the FTT concluded there was no such right. The FTT set out that an appeal right exists where HMRC have refused to do something which a person has asked HMRC to do, however in this case HMRC have not refused to do anything, they have instead deemed the purported OTT to have effect. As a result, there was no right to appeal. However, the FTT went on to consider in the alternative, what the position would be if it was wrong, and REL did have a right to appeal.
The FTT stated that, even if REL had a right of appeal, it would be refused because REL’s situation is exactly what paragraph 30 was designed to address. Both REL and HMRC operated on the basis that the OTT has been valid. If HMRC were prevented from retrospectively deeming the OTT effective, there would be a significant tax loss as REL was allowed to recover input VAT based on an effective OTT but did not pay output VAT on the sale arguing the OTT was not effective.
As a result of the above, the FTT concluded REL had ‘purportedly exercised’ the OTT and it was entirely reasonable and appropriate for HMRC to deem the OTT to have been validly exercised. The appeal was dismissed and the £50,000 assessment for the sale of the centre is valid.
Constable Comment: This case considered VAT Act 1994, Schedule 10, Paragraph 30 which allows HMRC to retrospectively dispense the permission conditions for an option to tax. In practice, if VAT exempt supplies of a property have been made prior to the proposed date of an option to tax, HMRC’s permission is required before the option is effective. However, as this case confirms, if this requirement is overlooked and both HMRC and a taxpayer operate on the basis that the OTT is effective (by recovering input VAT or charging VAT on supplies of the property) then HMRC is allowed, under paragraph 30, to dispense the permission rule.
Opting to tax a property involves complex VAT rules and it is important these are considered prior to making any option. It is always easier to address any potential VAT issues prior to making decisions regarding a transaction than to try and resolve errors afterwards. Constable VAT has relevant experience and would be pleased to assist with any option to tax or property related queries.
5. DIY Builders Scheme: Dwelling
This case concerned Mr Dunne’s (the appellant) appeal against HMRC’s refusal of a refund of VAT under the DIY housebuilders scheme. The claim was in the sum of £6,075. The VAT refund claim was made in respect of works undertaken at a residential property owned by the appellant. The planning permission allowed for a ‘single storey rear extension’ connected by a corridor to the existing dwelling. However, due to a change of circumstances, the plans were informally changed (agreed by the local authorities) so that the extension became a standalone detached building, unconnected to the existing property. As a result, the appellant made a DIY claim for a detached bungalow, taking the view that a new dwelling was created.
HMRC refused a refund under the DIY scheme on the grounds that the planning permission was for an extension of the existing dwelling and not for the construction of a separate dwelling. Extensions are specifically excluded from construction of a new dwelling, which applies to the DIY scheme. In addition, HMRC argued the property could not be disposed of separately to the existing building, therefore it was not a new dwelling.
The tribunal reviewed the evidence and whilst it was aware that the proposed connecting corridor was not built, it stated that in order for a DIY claim to succeed it is not sufficient that a standalone building is created, the planning permission must be for a dwelling. The agreed informal amendment cannot be interpreted as a grant of permission for a new dwelling. As a result, the Tribunal concluded that the planning permission was granted for an extension and the appeal cannot succeed.
Constable comment: This case highlights the importance of works being carried out in accordance with the planning permission, in order to claim a VAT refund under the DIY scheme. In this case, due to time constraints, the original planning permission was not amended formally to state a new dwelling is created. As a result, the VAT incurred was not recoverable. If you or your business would like assistance with a DIY claim, Constable VAT has relevant experience in this and the construction sector generally and would be pleased to assist.
6. DIY Housebuilders Scheme
This case concerned a DIY claim made by Mr Steven James Mort (the appellant) in the sum of £135,671.72 regarding a new dwelling.
HMRC refused to refund VAT charged on some invoices on the grounds that these related to supplies of services and should have been zero-rated. As the VAT was not properly charged, it is not eligible for a refund under the DIY scheme.
The appellant argued these were building materials only, and VAT was due at 20% which is due for a refund. The total sum of VAT originally under appeal was £37,439.82.
The FTT reviewed each invoice and sought to identify the predominant element of the supply, taking the view of a typical customer and considering the qualitative and quantitative importance of the different elements being supplied.
With regards to some of the invoices, the FTT ruled that the predominant element of the supply was the building materials. Even though it may have included installation services, those services were not sufficiently significant to prevent the supply being classified as “goods”. As a result, VAT incurred on these invoices was properly charged and therefore due for a refund under the DIY scheme. However, with regards to some invoices the FTT ruled that the predominant supply was the services. As a result, these should have been zero rated by the supplier and therefore were not due for a refund under the DIY claim.
In addition, HMRC had disallowed claims relating to furniture that was not considered to be building materials, such as bedside cabinets, mirrored wall and master dressing room furniture including lighting to wardrobes. The FTT agreed with HMRC regarding the furniture issue.
Constable Comment: In this case the FTT provided a useful analysis regarding whether the predominant element of a supply is the building material or the installation of the building materials. The point at which a supply of “installed goods” becomes part of a “construction service” is an interesting point that is seldom considered.
Perhaps the most interesting comments in the decision concern the FTT’s observations concerning the fact that HMRC was arguing that VAT could not be claimed when suppliers had charged VAT incorrectly but also took no action to refund overcharged VAT to those suppliers or notify them of their error. The FTT said: ‘The effect of HMRC’s approach to these proceedings is to seek to retain VAT to which HMRC has no ultimate entitlement. This is inherently unsatisfactory.’ The FTT also stated ‘Questions could legitimately be asked as to whether HMRC’s approach accords with HMRC’s collection and management obligations and the effective use of Tribunal time.’
Whether (as the FTT seems to suggest) HMRC’s approach amounts to an abuse of power and could be subject to a judicial review is hard to judge. It is certainly standard HMRC practice to take no action to correct overpayments of VAT unless the supplier who has made the VAT accounting error proactively seeks a refund. It also refuses to get involved if the matter is raised by a customer to whom VAT has been overcharged. This policy is difficult to reconcile with HMRC’s charter undertaking “We’ll work within the law to make sure everyone pays the right amount of tax and gets their benefits and other entitlements.”
Please note that this newsletter is intended to provide a general overview of the subject. No liability is accepted for the opinions it contains or for any errors or omissions. Constable VAT cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this blog post. Specialist VAT advice should always be sought in relation to your particular circumstance.