VAT — Respondent paying VAT on acquisition of land — Respondent disposing of land and entering into building contract in respect of it — Tribunal holding some tax recoverable because input tax incurred on acquisition attributable partly to zero-rated supply of building work — Regulation 101(2)(d) of Part 14 of VAT Regulations 1995 — Appeal dismissed
The respondent taxpayer acquired a freehold property in Brighton for £435,000, plus VAT of £76,125, which was charged on the acquisition following an election by the vendor under para 2 of Schedule 10 to the VAT Act 1994. On the same day, it sold the property to a housing association for £481,000; no VAT was charged on the sale because the respondent had not opted to tax the property under para 2. The respondent subsequently entered into a design-and-build contract with the association, pursuant to which it agreed to build residential units on the land at a price of £1.87m. Those works were zero-rated for VAT purposes.
The appellant commissioners decided that the £76,125 input tax was to be attributed solely to the subsequent exempt disposal of the land by the respondent. This meant that the respondent was unable to recover any of the tax. The respondent appealed to the VAT and Duties Tribunal. It contended that the input tax should be attributed both to the exempt supply, consisting of the sale of the land, and to the zero-rated supply of the building work, to enable it to recover part of the tax. The position was governed by, inter alia, regulation 101(2)(d) of Part 14 of the VAT Regulations 1995. Under that provision, the essential question was whether the land that was the subject of the transaction giving rise to the input tax was used by the respondent in making both the taxable supply, namely the building supplies contract, and the exempt supply, namely the sale of the land to the association.
Applying the guidance of the European Court, the tribunal considered that the input transaction constituted an acquisition of land and that the output transaction formed a single transaction comprising a sale of land plus a building contract. It held that there was a direct and immediate link between the acquisition of the land and the building contract, notwithstanding that they had taken place at different times, and that the former had been a cost component of the latter. It accordingly held that the input tax on the acquisition was attributable to the zero-rated building contract as well as to the sale to the association, and that some tax was therefore recoverable. The commissioners appealed.
Held: The appeal was dismissed.
In order to test whether the land had been used by the respondent taxpayer to make the taxable, but zero-rated, supplies under the building contract, it was necessary to apply a dual test: (i) was there a direct and immediate link?; and (ii) was the cost of acquiring the land a cost component of the supply of the building services?: BLP Group plc v Commissioners of Customs & Excise (C98/98) [1995] STC 424 and Midland Bank v Commissioners of Customs & Excise [2000] STC 501 considered. The tribunal had accurately set out the tests to be applied, having regard to the provisions of the legislation and to the judgments of the European Court, and it had been entitled to find that those tests had been fulfilled: Commissioners of Customs & Excise v Wiggett Construction Ltd [2001] STC 933 applied. Wiggett was indistinguishable from the present case in any material respect, and had been correctly decided.
Philippa Whipple (instructed by the solicitor to Customs & Excise) appeared for the appellant; Richard Barlow (instructed by Rowel Genn Solicitors) appeared for the respondent.
Sally Dobson, barrister
