Land and property – Construction – VAT — Associated companies supplying land and building services for erection of holiday homes — Whether services constituting single supply of completed holiday homes – Whether transactions amounting to abusive practice – Appellant supplier’s appeal allowed – Respondents’ cross-appeal dismissed
The appellant was the freehold owner of land that had the benefit of planning permission for up to 575 residential homes subject to a condition that they would not be occupied as principal places of residence. For VAT purposes, they were therefore regarded as holiday or second homes. The appellant granted 999-year leases of plots of land to customers who, although they were not contractually obliged to do so, contracted with a company (C), which was in the same ownership as the appellant, to construct holiday homes on the plots.
The supply of leases was standard-rated; by virtue of item 1(e) they were excluded from exemption under Group 1 of Schedule 9 to the Value Added Tax Act 1994 as being the grant of an interest in holiday accommodation. Supplies by C were zero-rated, as constituting supplies in the course of construction of dwellings within Schedule 8, Group 5, item 2(a). Supplies by subcontractors to the appellant were similarly zero-rated. The supply of a completed holiday home was excluded from exemption because of item 1(e) and was not zero-rated under item 1 of Group 5 of Schedule 8 because of the restriction on residence, which was covered by note (13) to Group 5.
The respondents raised assessments on both the appellant and C on the basis that the leases and build agreements effected single supplies of completed holiday homes. The First-tier Tribunal rejected that argument but held that the transactions in question constituted an abuse of rights such that the VAT treatment fell to be redefined in accordance with the principle in Halifax plc v Commissioners of Customs & Excise C-255/02 [2006] Ch 287. Thus, the correct treatment was that the appellant, as developer, would have made a supply of the completed holiday home in each case.
The appellant appealed against the decision that there was an abusive practice within the Halifax principle. The respondents contended that (i) the tribunal had been entitled to find that there was an abusive practice; and, by way of cross-appeal, (ii) the appellant had made single supplies of holiday homes to the purchasers or, alternatively, the appellant and C had made joint supplies of completed holiday homes.
Held: The appeal was allowed; the cross-appeal was dismissed.
(1) For VAT purposes the appellant had made single supplies of leases of building plots and of building services. Absent abuse, it was not possible to combine supplies by two suppliers under two contracts so as to result in one supply for VAT purposes. Accordingly, the respondents’ cross-appeal failed and the appeal turned solely on the abusive practice issue, which fell to be decided on the basis that the contracts were genuine and not a sham.
(2) An abusive practice could be found to exist only if, first, the transactions concerned, notwithstanding the formal application of the conditions laid down by the relevant provisions of Council Directive 77/388/EEC (the Sixth VAT Directive) and the national legislation transposing it, resulted in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions. Second, it had to be apparent from a number of objective factors that the essential aim of the transactions was to obtain a tax advantage.
A genuine need for an end result was not sufficient to avoid the first limb; the structure for achieving that end that was the crucial point. The focus was on identifying artificial elements that could be said to produce a result contrary to the purposes of the directive. It was necessary to effect a comparison in determining whether the requirement of fiscal neutrality had been breached; the comparison was to be made between, on the one hand, the scheme in question, whose artificial elements were to be identified, and, on the other, normal commercial operations.
The first limb of the Halifax principle concerned abuse that resulted in a tax advantage contrary to the relevant provisions of the directive and the national legislation transposing it. Since “neutrality” was directed at ensuring that, within each member state, similar goods or services should bear the same tax burden, it was appropriate to consider national legislation as well as the directive in order to understand the purpose that was to be respected. The question was whether the transactions resulted in a VAT advantage to the trader that was contrary to the purposes of the sixth or the 1994 Act.
In the instant case, the tribunal’s reasoning did not address why it was appropriate to adopt as the comparator the development model (where a company supplied a completed holiday home with its site) rather than the self-build model (where one party supplied the land and another built the holiday home). There was a clear difference between buying the plot and contracting for the building and buying of a completed building. The customers in the instant case purchased an interest in the land at the outset; they paid for the construction work in stages. They were able to choose different finishes internally and even externally, subject to planning consent.
In those circumstances, the First-tier Tribunal’s decision on the first limb of Halifax was flawed and could not stand. It had erred with regard to the identification of the appropriate comparator. Although it had referred to a trader’s right to adopt, a course that resulted in less tax, the tribunal did not address the argument on the facts or explain why the course adopted by the appellant and C was anti-purposive, other than to state that less tax was paid under the adopted route. The correct comparison was between transactions taking place under the self-build model and those under which the appellant supplied the land and an unrelated company built the holiday home. The first limb of Halifax was not therefore satisfied.
Jonathan Peacock QC and Jolyon Maughan (instructed by Michael Welch & Co) appeared for the appellant; Malcolm Gammie QC and Vikram Sachdeva (instructed by the legal department of HM Revenue & Customs) appeared for the respondents.
Eileen O’Grady, barrister
