VAT – Zero rating – Nature of supply – Appellant constructing holiday lodges for customers on plots to be let to them by landowner – Agreement with customers incorporating standard conditions of sale (4th ed) – Whether supply of holiday lodges zero-rated for VAT as construction of dwelling within item 2 in Group 5 of Schedule 8 to Value Added Tax Act 1994 – Whether composite supply of construction services plus procurement of grant of lease by landowner to customer – Appeal dismissed
The appellant company was involved in the construction of holiday lodges in a holiday village in Norfolk pursuant to an arrangement with the freeholders of the land. Customers wishing to purchase lodges would enter into an agreement with the appellant for the sale and construction of the lodge and the landowner would grant a lease to the customer of the plot on which the lodge was to be built. The agreement between the appellant and the customer expressly incorporated the standard conditions of sale (4th ed).
The appellant contended that the relevant supply under the agreement was zero-rated for VAT purposes, being a supply consisting of the construction of a dwelling within the meaning of item 2 in Group 5 of Schedule 8 to the Value Added Tax Act 1994. The respondents disagreed, taking the view that, when the appellant entered into contractual relations with a customer under the relevant agreement, it made a composite supply of construction services and the procurement of the grant of a lease by the landowner of the plot on which the lodge was to be constructed.
Upholding that decision, the first-tier tribunal (FTT) decided that the incorporation of the standard conditions of sale into the agreement had the effect that the appellant agreed to procure the grant of a lease. It held that that result flowed from: (i) standard condition 4.1.1, under which the seller was to provide the buyer with proof of title to the property and of its ability to transfer it or to procure its transfer; and (ii) standard condition 6.8, under which a party who was ready, able and willing to complete could give a notice to complete to the other party. It considered that its conclusion was supported by other provisions of the agreement, including its reference to the parties as “Buyer” and “Seller” and a provision for the appellant to give vacant possession to the buyer on completion.
The appellant appealed. It contended that the standard conditions were inconsistent with the terms of the agreement and should therefore be disregarded.
Held: The appeal was dismissed.
(1) The correct construction of the agreement was determinative of the issue of what the appellant provided to a customer in consideration of the customer’s payment. Standard condition 4.1.1 was concerned with the right of the buyer to be assured that the seller was able to transfer the property to the buyer or to procure its transfer by another party. Likewise, standard condition 6.8, by entitling the buyer to give a notice to complete to the appellant, placed the appellant under an obligation to ensure the grant of a lease by the landowner. While the condition did not expressly impose that obligation on the appellant, sense could only be made of it if it placed the appellant under an obligation to ensure that the customer, as buyer, was able to compete his purchase of the lodge.
The standard terms were not inconsistent with the other terms of the agreement. The agreement had to be construed as it would be understood by a reasonable person, having all the background knowledge that would have been available to the parties at the time of contracting. The most relevant surrounding circumstance was that the customer was agreeing at one and the same time to buy a built lodge from the appellant and to take the relative lease from the landowner. The agreement provided both for the sale by the appellant of a built lodge, to be completed, and for vacant possession of the lodge to be given to the customer on completion. Vacant possession could only be given by the landowner. In those circumstances, the FTT had properly concluded that the appellant undertook to procure the landowner to grant a lease to the customer.
It followed that the supply by the appellant to the customer was a composite supply which included an undertaking to procure that the landowner would grant a lease of the plot to the customer. That supply did not fall to be zero-rated under item 2 in Group 5 of Schedule 8 to the 1994 Act and was instead a standard-rated supply for VAT purposes.
Michael Collins (instructed by IVC (VAT Consultants) LLP) appeared for the appellant; Brendan McGurk (instructed by the general counsel and solicitor to HM Revenue and Customs) appeared for the respondents.
Read a transcript of Fairway Lakes Ltd v Commissioners for HM Revenue and Customs here
Sally Dobson, barrister
