Housebuilding company liable for input tax on purchase of development site – Site bought with initial intention of effecting zero-rated supply of completed development – Company agreeing to sell site – Company making simultaneous contracts with buyer for construction of houses on site – Commissioners claiming that input tax should be wholly attributed to (exempt) sale of site – VAT tribunal accepting company’s argument for apportionment – Commissioners’ appeal dismissed
In December 1995 the respondent housebuilding company bought a derelict site in Manchester for £335,000, plus £58,625 VAT, an option to tax having earlier been notified in respect of the site. The company reclaimed the VAT in its return for its tax period ending December 1995 on the basis that it intended to develop the site with a view to effecting the zero-rated supply of a completed housing development. On 23 December 1996 the company entered into four agreements with a housing association: (1) a land sale agreement for £430,000; (2) a standard form building contract for the construction by the company of 45 flats on the site for £1,618,500; (3) an agreement for the variation of the intended construction works; and (4) a further standard form building contract for the construction of 12 additional flats for £403,790. It was common ground that: (a) the company would not have entered into the land sale agreement but for the simultaneous conclusion of the other agreements; (b) the sale of the land was an exempt supply within item 1 of Group 1 of Schedule 9 to the Value Added Tax Act 1994; and (c) the initial deduction of VAT had to be adjusted to reflect the company’s change of intention.
The commissioners took the view that the input tax was to be attributed entirely to the exempt supply under the land sale agreement, and accordingly required the payment of the full sum of £58,625, plus interest. The VAT tribunal, sitting in Manchester, accepted the company’s contention that, on a proper application of regulation 108 of the VAT Regulations 1995, the input tax was properly attributable to both the exempt supply and the supplies of the zero-rated construction services, and that a corresponding apportionment should be made. In reaching its conclusion, the tribunal reasoned that the company, having initially intended to make no supply other than a taxable supply of the property in its improved state, had not modified its intention, save to the extent that the disposal of the relevant land constituted an exempt supply. The commissioners appealed, contending that the tribunal had applied the wrong test and that the decision reached was Wednesbury unreasonable.
Held: The appeal was dismissed.
The tribunal had correctly adopted the test established in BLP Group plc v Customs & Excise Commissioners C4/94 [1995] STC 424, whereby: (1) the input had to be “objectively linked” to the taxable transaction (the subjective intention or motive being irrelevant); (2) the link had to be “direct and immediate”; and (3) the input had to be a cost component of the taxable transaction. Nor could the commissioners contend that any development of, or change in, those principles had been brought about by the later decisions of the European Court in Midland Bank plc v Customs & Excise Commissioners C98/98 [2000] STC 501 and Abbey National plc v Customs & Excise Commissioners (C408/98) [2001] STC 297.
The existence or otherwise of a direct and immediate link was a question of fact, to be resolved by the tribunal after taking into account all the circumstances surrounding the transactions in issue: see Midland Bank. If the primary facts justified alternative inferences of fact, an appellate court could not substitute its own preference for that adopted by the tribunal: see per Patten J in RAP Group plc v Customs & Excise Commissioners [2000] STC 980 at p989. The conclusion that the company had used the site to make the taxable supply of the building services was one that the tribunal was entitled to reach after taking into account: the nature of the company’s business; the purpose for which the site was acquired; the fact that the four agreements were all part of an integral package; and that the sale of the site was the “quid pro quo” for the association’s entry into the construction agreements.
Raymond Hill (instructed by the solicitor to Customs & Excise) appeared for the appellants; Andrew Hitchmough (instructed by Eversheds, of Manchester) appeared for the respondent.
Alan Cooklin, barrister
