Input tax — Building works — Intention to grant major interest in buildings on completion of works — Inability to find purchaser — Granting of short let pending disposal of major interest — Whether taxable person still entitled to credit for input tax incurred during the building works — Whether input tax should be apportioned — Tribunals holding that input tax should be apportioned — High Court upholding those decisions
In Briararch, the company, a registered builder, purchased Stratford House, a Regency property in Cheltenham designated as a Grade 2 listed building. It intended to convert the property into offices and grant a lease of the whole building for a term of at least 25 years at a full rent with periodic rent reviews. The work started in June 1987 and was completed by March 1988 at a cost of £600,000. From July 1987 the company had been looking unsuccessfully for a tenant. When the work was completed, it needed rental income to cover its interest obligations to the bank and granted a four-year lease commencing June 1988. The intention was at all times to grant the 25-year lease. The short lease was expedient to provide short-term interest and would not have taken place had the company been successful in any of the negotiations which took place for the long lease. A VAT tribunal accepted that the company intended to grant a 25-year lease following the end of the four-year lease and allowed it to deduct 25/29ths of the input tax.
In Curtis, the company acquired some building land and obtained planning permission to build a house on it. It was then, and always remained, the intention of the company to dispose of the freehold interest in the house on completion. In due course the company claimed repayment of, and was repaid, the VAT that it had paid on supplies made to it during the prescribed accounting period in connection with the building of the house. Attempts to sell the house were unsuccessful and the company had the burden of interest charges on its borrowings. An opportunity arose for a short let of six months, which was then extended for three months. A buyer was eventually found and the house sold. A VAT tribunal held that the Commissioners of Customs & Excise were not entitled to repayment of the whole of the input tax reclaimed by the company and ordered an apportionment to be made.
On appeal by the commissioners against both decisions the same issue arose: whether taxpayers who were entitled to receive credit for the input tax incurred during building works lost that right if they let the premises on a short let before finally granting a major interest in it as was their original intention; or whether they were entitled to credit for an appropriate amount of input tax. A taxable person who constructs a dwelling-house and grants a major interest in it makes a zero-rated supply. That being so, the supply is a taxable supply as it is not an exempt supply. On the other hand, a person who grants any interest in, or right over, land such as a short tenancy makes an exempt supply; being an exempt supply, it is not a taxable supply. A major interest means in the case of land “a fee simple or a tenancy for a term certain exceeding 21 years”: see Value Added Tax Act 1983, section 48(1).
Held The appeals were dismissed.
1. The case turned on the proper construction of regulations 30 and 34 of the Value Added Tax (General) Regulations 1985, which provided for the receipt of credit for input tax.
2. Pursuant to regulation 30(1)(b) the input tax was reclaimable on the basis of the intention held by the company. Regulation 34 was the only provision which said that input tax could be claimed back. There had, within the relevant six-year period, been a use of the supply in making an exempt supply. The consequences were set out in regulation 34(2), which envisaged apportionment. The requirement was that the apportionment should be made in accordance with the method used when the original input tax reclaimed was reclaimed. That involved going back to regulation 30.
3. On that return journey, the situation had changed. Input tax could not be said to have been wholly used in making exempt supplies, for the simple reason that the constant intention to make a taxable supply still subsisted. That was the very situation for which regulation 30(1)(d) existed. It enabled there to be an apportionment such as was envisaged by regulation 34.
4. The whole of the scheme of the 1985 regulations envisaged apportionment in such cases as the present and simply because a short lease had been granted to tide the taxpayer over did not prevent his relying on his continued intention to make a taxable supply.
Richard Drabble (instructed by the Solicitor of Customs & Excise) appeared for the commissioners; Patrick Soares (instructed by Bretherton Price & Elgoods, of Cheltenham) appeared for the taxpayers.
