Input tax — Output tax — Lease of building by taxpayer — Taxpayer covenanting to renovate building — Rent-free period agreed — Input tax claimed on cost of work — Assessment for output tax due on supply of building services — High Court holding assessment to output tax out of time — Otherwise output tax would have been payable
In 1987 Ridgeons (Saffron Walden) Ltd (“Ridgeons”) acquired a sawmill from the liquidator of another company. The sawmill needed renovation. A new company (“the taxpayer”) was formed to operate the sawmill. Ridgeons agreed to grant a lease to the taxpayer in consideration of the taxpayer covenanting to renovate the building and to pay rent after a three-year rent-free period, which would reflect the costs of the renovation work. The taxpayer carried out the work at a cost of £372,725 and claimed £51,598 input tax.
When the Customs and Excise discovered that the work was supplied by the contractors to the lessor rather than the lessee, they disallowed the input tax and issued an assessment for that amount. Following correspondence between the parties, Customs accepted that the taxpayer was entitled to deduct the input tax claimed, but took the view that the lease contained a contract for the supply of building services by the taxpayer to Ridgeons on which output tax was due. Since the alleged output tax exceeded the input tax assessment by £3,183, Customs raised an additional assessment in that amount. Customs later accepted that the additional assessment was out of time and it was withdrawn. However, they sought to maintain the output tax assessment up to the amount of the original assessment for overclaimed input tax. The taxpayer claimed that it was not open to Customs to withdraw an assessment for input tax and substitute an assessment for output tax which would have been admittedly out of time. The VAT Tribunal decided that the assessment for output tax was not a new assessment but merely an amendment of an earlier assessment which had been made in time. It also decided that the taxpayer had made a taxable supply of services to Ridgeons for consideration in the form of the right to occupy the sawmill for three years without paying rent. The taxpayer appealed.
Held The appeal was allowed.
1. Customs were not entitled to amend an assessment by replacing an amount of input tax alleged to have been overpaid with a different amount of output tax which could not be assessed because an assessment would have been out of time.
2. However, if the amendment had been permissible the output tax would have been payable. Repairs required to be carried out under a lease which gave the tenant a rent-free period of occupation were taxable services supplied by the tenant to the landlord. The rent-free period was consideration for carrying out the building works. The execution of the lease was simply a formal document incorporating in legal terms what had been previously agreed.
Joe Smouha (instructed by HH Mainprice & Co) appeared for the taxpayer; Kenneth Parker QC (instructed by the solicitor to Customs and Excise) appeared for the Commissioners.
