Conversion of house into flats for holiday lettings — Input tax on conversion costs reclaimed — Some flats let for holiday accommodation — VAT-exempt lease of whole building subsequently granted — Whether input tax relating to conversion deductible in full — VAT tribunal holding that repayment of input tax proportionate to number of flats actually used for holiday letting — Appeal to high court — Whether taxable supply of all flats though only some used for holiday letting — Whether VAT regulations ultra vires because not enacted in accordance with EC law — Appeal by taxpayer dismissed
Between February 1 1987 and December 31 1988 the appellant company, which carried on business as general builders, converted a property at Montford House, Queen’s Road, Richmond, Surrey, into 10 self-contained furnished flats. While the work was in progress the intention was that the completed flats should be let as holiday accommodation for people coming to the London area. It informed the Tourist Board that the flats were available as holiday accommodation and engaged Holiday Flats Services Ltd as its letting agents.
Between December 1 1988 and February 28 1989 some, but not all, of the 10 flats were let as holiday accommodation. In February 1989 all the flats were empty and the company accepted an offer from an American firm to enter into a lease of the whole building so that the flats could be used to accommodate it’s employees. The lease was granted on February 23 1989 for a year with an option to renew for another year. A difficulty arose because for VAT purposes the supply of holiday accommodation was a taxable supply whereas the granting of a one-year lease of land was not.
Throughout the refurbishment works the company had been correctly deducting the input tax they had been paying to their suppliers on the goods and services they required to enable them to complete those works and, if they had carried out their original intention of letting all the flats as holiday accommodation, no problem would have arisen. However, once the Commissioners of Customs & Excise were told about the lease, they took the view that the company was not entitled to credit for that input tax. They assessed the company in the sum of £53,386 to recover the tax for which credit had been given. This was subsequently reduced to £28,678. A VAT tribunal upheld the commissioners’ contentions and the company appealed.
The two points which arose for decision on this appeal were: (1) whether because all the flats were originally advertised as holiday accommodation, the effect of Note 1 to Item 1 of Group 1 of Schedule 6 to the Value Added Tax Act 1983 (in its form at the material time) was that there was a taxable supply of all the flats even though only four of them were in fact let and used as holiday accommodation; and (2) whether regulation 34 of the Value Added Tax (General) Regulations 1985 (SI 1986 No 886), as amended, whose provisions had enabled the commissioners to succeed before the tribunal, was ultra vires because it had not been enacted in accordance with what were said to be the mandatory provisions of the EC Sixth VAT Directive (77/338). Under the 1983 Act a supply of goods or services was an exempt supply if it was of a description specified in Schedule 6. Group 1 of Schedule 6, Item 1(aa) at the material time referred to the grant of any interest in or right over or of any licence to occupy land other than the provision in a house, flat etc of holiday accommodation. Note 1 provided that holiday accommodation included an accommodation advertised or held out as such.
Held The appeal was dismissed.
1. Parliament had included Note 1 so that a letting would not escape VAT simply because the commissioners could not prove that a flat advertised as holiday accommodation was in fact used as holiday accommodation by someone who answered the advertisement. The supply became taxable on the provision of the accommodation not on the publication of the advertisement. If, as in this case, there was no causative nexus between the publication of the advertisement of holiday flats and the letting of the whole building for some quite different purpose, then there was no provision of holiday accommodation within the meaning of Item 1(aa).
2. The flats had been refurbished with the intention of letting them separately as self-contained units of accommodation. If at the time when the original returns were made, the company’s intention had been to let five of them as holiday accommodation and the remaining five in circumstances which would amount to an exempt supply and if timber and paint and other building materials had been supplied for the refurbishment work, then at that stage the calculations required by regulation 30(1)(d) of the 1985 regulations for computing the deductible amount of input tax would have been carried out, unless the commissioners had directed the use of some alternative method of securing a fair and reasonable attribution of the input tax to taxable supplies pursuant to their powers under regulation 30(4) or had sanctioned the use of a method other than that specified in regulation 30 pursuant to their powers under regulation 30(5).
3. That exercise did not have to be carried out initially because the original intention had been to let all the flats in circumstances in which the lettings would constitute taxable supplies. However, when the original intention changed and an adjustment had to be made, then by regulation 34(2) the taxpayer was obliged to carry out the same exercise or apportionment as he would have had to do if his original intention had been to let the flats for non-holiday purposes for which they were eventually let.
4. Under the sixth directive the right to deduct tax arose at the time when the deductible tax became chargeable. In so far as the goods and services were used for the purposes of his taxable transactions the taxable person should be entitled to deduct from the tax, which he was liable to pay, VAT due or paid in respect of goods or services supplied to him by another taxable person. Article 17(5)(c) permitted member states to authorise or compel the taxable person to make the deduction on the basis of the use of all or part of the goods and services instead of it being made on the basis of a proportion of turnover and the UK availed itself of that permission when the scheme embodied in regulations 30 and 34 at the material time was introduced. The derogation permitted by article 17(5)(c) covered not only a conventional once-and-for-all deduction where there was no time lay between the intended use and actual use but also a scheme of provisional deduction followed by an adjusted deduction such as occurred in this case. There was nothing in regulations 30 and 34 which fell outside the derogations permitted by article 17(5) (c) or which otherwise offended the principles prescribed by the directives.
Joe Smouha (instructed by HH Mainprice & Co) appeared for the company; Charles Flint (instructed by the Solicitor of Customs & Excise) appeared for the Commissioners.
