VAT — Respondent taxpayer purchasing land — Taxpayer selling land and entering into development contract with purchaser — Whether taxpayer able to recover VAT paid on initial acquisition of land — Whether direct and immediate link between that acquisition and development contract — Commissioners’ appeal allowed
The respondent taxpayer paid VAT on its purchase of a parcel of land, having elected to tax the property under para 2 of Schedule 10 to the VAT Act 1994. It subsequently sold the land to a housing association: VAT was not paid on that sale because it was an exempt transaction. The taxpayer also entered into a development contract with the housing association, under which the taxpayer was to construct housing on the land. It paid VAT on the goods and services it used in the course of carrying out the building contract. The taxpayer later sought to recover all the VAT that it had paid. It was not disputed that the VAT paid on the goods and services was recoverable as input tax that was deductible against the output tax charged on the price of the development contract. However, the appellant commissioners decided that the VAT paid on the purchase of the land was not recoverable.
On appeal to the VAT Tribunal, the taxpayer argued that the latter tax was recoverable because of the commercial connection between the various transactions. The tribunal accepted that argument, and found that there was a direct and immediate link between the land purchase and both the land sale and development contract. The tribunal’s decision was upheld by a judge on an appeal by the commissioners. The commissioners appealed to the Court of Appeal.
It was common ground that a supply of land was a supply of “goods” for the purpose of the VAT Sixth Council Directive 77/388/EEC; the question was whether the land was “used for the purpose of the taxpayer’s taxable transaction”, namely the development contract, as required by Article 17(2) of the directive.
Held: The appeal was allowed.
The essence of the tribunal’s reasoning was to conflate all the transactions because of their commercial links. It had applied a test of attribution for which no authority existed, namely whether the input had enabled the taxpayer to make a taxable supply. The land purchase transaction was necessary to make the performance of the building contract commercially possible, but it was not a cost component of the contract itself in the same way as the cost of the materials used. Its link with the contract was not direct and immediate, as required. The development contract would not have been made but for the associated land purchase and sale; however, “but for” was not the applicable test and did not equate to the “direct and immediate link” and “cost component” tests: BLP Group plc v Commissioners of Customs & Excise C-4/94 [1996] 1 WLR 174, Midland Bank plc v Commissioners of Customs & Excise C-98/98 [2000] 1 WLR 2080 and Abbey National plc v Commissioners of Customs & Excise C-408/98 [2001] 1 WLR 769 considered.
Melanie Hall QC (instructed by the solicitor to Customs & Excise) appeared for the appellants; Richard Barlow (instructed by Rowel Genn Solicitors) appeared for the respondent.
Sally Dobson, barrister
