VAT – Input tax – Supply – Building works – Appellant carrying out redevelopment on art school campus – Works comprising construction of new building and partial demolition and reconstruction of existing building – Appellant seeking to recover input tax incurred on costs relating to works on existing building – Respondent commissioners refusing claim – First-tier Tribunal upholding decision – Appellant appealing – Whether supplies made for consideration constituting economic activity – Whether input tax fully recoverable – Appeal dismissed
The appellant was a Higher Education Institution Art School specialising in fine art, design and architecture with a campus at Garnethill, Glasgow. The appellant carried out a redevelopment project which consisted of the demolition of two buildings, the partial demolition, reconstruction and refurbishment of the Assembly Building, and the construction of a new building.
Construction of the whole site was sufficiently completed to enable the new building to be opened to students on 6 January 2014 and the Assembly Building on 15 January 2014. The formal opening on 9 April 2014 was of both buildings. Following completion of the works, the Assembly Building retained, on three sides, the appearance of an ornate sandstone building. The fourth side was a party wall with the new building with a single link door. The reconstructed Assembly Building was purpose designed as a student union with a bar and club for students. The new building was a modern glass and steel-clad building managed by the appellant. It primarily comprised learning, teaching and technical spaces with accommodation for academic support and management. The two buildings were classified separately for non-domestic rates with the Assembly Building classified as a business and the new building as a charity.
An issue arose whether the appellant was entitled to recover the whole of the input tax incurred on costs relating to the partial demolition, reconstruction and refurbishment of the Assembly Building. The appellant’s claim to that effect was refused by the respondent commissioners and that refusal was upheld by the First-tier Tribunal (FTT).
The appellant appealed contending that the two buildings should be regarded as separate buildings. The Assembly Building was being used wholly for taxable purposes. The works carried out in respect of that building constituted a separate supply for VAT purposes and the input tax on the costs attributable to those works ought to have been fully recoverable.
Held: The appeal was dismissed.
(1) The FTT’s finding, as an inference of fact, that there was a single building was clearly open to the FTT and there was no reason to interfere with it. On the issue of whether there was a single supply or two separate supplies, a supply which comprised a single service from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system. The essential features of the transaction had to be ascertained in order to determine whether the taxable person was supplying the customer with several distinct principal services or a single service. There was a single supply where two or more elements or acts supplied by the taxable person were so closely linked that they formed, objectively, a single indivisible economic supply which it would be artificial to split. The question whether there was or was not a single supply was one of law; nevertheless an appellate court had to show circumspection before interfering with the decision of a tribunal on a question of classification of a supply: Card Protection Plan Ltd v Customs and Excise Commissioners [1992] 2 AC 601, Levob Verzekering BV v Staatsecretaris van Financiën [2005] ECR-I 9433 and Dr Beynon and Partners v Customs and Excise Commissioners [2005] 1 WLR 86 followed.
In the present case, the FTT had applied the correct legal test and reached a decision which it was entitled to reach. The economic and commercial reality of the construction contract was a single development of the site as a whole. There was a single delivery strategy. Funding was required and obtained for the project as a whole. The decision not to demolish the Assembly Building altogether, but to retain its facades and roof, was taken for reasons of value for money. Partial demolition and refurbishment of the Assembly Building on its own was never contemplated. An additional feature supporting the single supply characterisation was the fact that there was a single contract with payment being made during the construction phase in accordance with invoices issued for the whole project. The project should be regarded as a single supply from an economic point of view and a split between the two buildings would be artificial. Although the appellant wanted and obtained two separate premises with different functions, that did not raise an inference that there were two separate supplies. It was always the appellant’s intention that the project should consist of both, whether as parts of a single new building or, as was decided, with most of the outer structure (though nothing else) of the Assembly Building being retained. Separate programming and separate attribution of construction costs was of minimal importance when seen against the background of the project as a whole.
(2) Under section 4(1) of the Value Added Tax Act 1994, VAT was chargeable on any supply of goods or services made in the UK where it was a taxable supply made by a taxable person in the course or furtherance of any business carried on by him. That provision had to be interpreted in conformity with the Principal VAT Directive. In the present case, there was a supply for a consideration so as to satisfy article 2 of the Directive. There was a direct link between the supply of the services and the consideration received by the taxable person. The payment of rent was one of the conditions under which the student union was granted occupation of the Assembly Building and the necessary direct link was established. The test, in deciding whether the article 9 requirement of economic activity was satisfied, was whether the supply was made for the purpose of obtaining income on a continuing basis. On the facts, the purpose of the supply was not to provide the appellant with income from exploitation of the building but rather to facilitate the provision of a student union. Had it been necessary to decide the point, the appellant was not making taxable supplies to the student union and input tax on a separate supply in relation to the Assembly Building would not have been fully recoverable.
Philip Simpson QC (instructed by CKR VAT Consultancy Ltd) appeared for the appellant; Ross Anderson (instructed by the Office of the Advocate General for Scotland) appeared for the respondents.
Eileen O’Grady, barrister
Click here to read a transcript of Glasgow School of Art v Commissioners of HM Revenue and Customs
