VAT – Recovery of input tax – Regulation 109 of Value Added Tax Regulations 1995 – Claimant making exempt supplies of social housing – Claimant unable to recover input tax paid on fees for professional services engaged in development of housing – Transfer of development function to separate company – Company charging sum equal to fees previously incurred by claimant – Whether claimant entitled to recover input tax under regulation 109 – Whether change of intention from making exempt supplies to taxable supplies – Defendants refusing claim – Appeal allowed
The claimant registered social landlord provided social housing. Part of its work involved the acquisition of new sites and the construction of residential accommodation. Prior to 2006, it carried out construction projects and directly engaged surveyors, architects, planning consultants and building contractors. Since the claimant’s provision of social housing for rent involved a VAT-exempt supply of services, it was unable to recover any VAT paid as part of the fees for those professional services. In order to remedy this, it set up a subsidiary development company, V, to undertake all future development activity and assigned to it all unfinished projects. Under that arrangement, V would provide the claimant with zero-rated supplies of design-and build- services, and would therefore be able to recover any input tax that it paid on fees for professional services engaged in the course of such supplies.
In respect of the unfinished development projects, the claimant invoiced V for a sum equal to the professional fees already paid on each project. It treated that transaction as a taxable supply by V and accordingly charged the VAT to V. It subsequently sought to recover the input tax it had previously paid on the ground that the new arrangements involved a change of intention, within the meaning of regulation 109 of the Value Added Tax Regulations 1995, from an intention to use the professionals’ services to make exempt supplies to that of using those services to make taxable supplies to the development company. The defendants rejected that claim on the basis that there had been no real change of intention since the professional services would ultimately still be used to make exempt supplies of social housing, albeit that V was interposed to carry out the design and build. The claimant appealed.
Held: The appeal was allowed.
The defendants’ approach to the analysis of the claimant’s intention was incompatible with binding authority. The right to deduct input tax arose only in respect of goods and services that had a direct and immediate link with taxable transactions; the ultimate aim pursued by the taxable person was irrelevant: BLP Group plc v Customs & Excise Commissioners C-4/94 [1996] 1 WLR 174 applied. Upon the assignment in 2006, the supplies of professional services were directly and immediately linked to the supply by way of assignment from the claimant to V. The professional services had been used in the making of, and were linked to, that taxable supply by the claimant to V rather than the ultimate exempt supply of social housing by the claimant to tenants. The link was sufficiently direct and immediate because the value of the taxable supply to V, in the form of the assignment of rights in respect of the various projects, varied depending upon how much work had been carried out in any particular project, and the overall price to be paid by the claimant to V for completing each project would be directly linked to the amount of work that had already been undertaken on behalf of the claimants. Thus, the value of the taxable supply made by the claimant in each case would vary according to the amount of services that the claimant had used in making that supply. The professional services for which the claimant paid prior to 2006 therefore constituted cost components of the taxable supply to the development company.
James Rivett (instructed by Gregory Rowcliffe Milners) appeared for the claimant; Sarabjit Singh (instructed by the legal department of HM Revenue & Customs) appeared for the defendants.
Sally Dobson, barrister
