VAT Case Update II

Andrew Needham, Director of VAT Solutions (UK) Ltd, presents a further selection of recent VAT decisions.

Tribunal says work done on village hall did not qualify for charitable zero-rating

This was an appeal against HMRC's decision that building works undertaken at a village hall were zero-rated under the ‘relevant charitable purpose’ building provisions of Item 2 Sch 8 Group 5 VATA 1994. The case considered whether the new works to the village hall constituted an annexe or an extension. Whilst Note 16 of Group 5 permits zero-rating for construction of a charitable building, it excludes enlargements or extensions (except where it creates an additional dwelling) or an annexe. Note 17, however, allows the construction of an annexe to be zero-rated where,

“whole or part of the annexe is intended for use for a relevant charitable purpose and –

(a) the annexe is capable of functioning independently from the existing building; and

(b) the only access, or where there is more than one means of access, the main access to: -

(i) the annexe is not via the existing building; and

(ii) the existing building is not via the annexe."

The Tribunal referred to the MacNamara case which gives a clearer insight into Note 16. In this case, the point was made that the annexe can only be zero-rated if it is sufficiently 'un-integrated' with the existing building. Definitions of enlargement, extension and annexe were also given. An extension creates an additional section which has a measure of integration with the existing building, whilst an annexe is an adjunct of the existing building with little integration with the existing building. On whether the works in question created an annexe or an extension, the Tribunal looked for evidence of some independent function as well as physical separation to test lack of integration. The Tribunal used the judgment in Cantrell No.1 & No.2 to summarise a method of distinguishing between:

(i) an extension and an enlargement. and

(ii) whether the works constitute an annexe of an existing building

The Tribunal took the approach that they should test the works in question against each of the concepts in Note 17. HMRC contended that the works constituted an extension and that educated laymen would call it an extension. They argued that the roof line visibly continued the roofline of the existing building and also that the inner layout indicated that the facilities of new works were equipped to function for the benefit of the old hall, and as such, was consistent with the new works being an extension. HMRC further argued that even if the Tribunal found it to be an annexe and not an extension, then by virtue of 17(b) it would not qualify for zero-rating. This was because the ‘main access' (measured by size) to the annexe was via the existing building (evidenced by floor plans).

The appellant made six arguments:

1. The effects of regulatory constraints on how buildings should be designed should be discounted when approaching the statutory tests. The Tribunal's response was that the VAT tests in Note 16 apply to what is physically constructed regardless of the reasons for its particular construction.
2. Local geography should be taken into account. The village is built on a steep hillside and so this restricts the design of the building. The Tribunal's response was that they cannot apply different meanings of the statute in different parts of the UK. However, they could attach less weight to the long and thin construction of the new works given it was not built in a flatter part of the UK.
3. The size and shape of the village hall site constrained them from constructing the annexe as a separate building linked by a corridor to the old building. The Tribunal's response was that the test related to the building as built, and intention would not be taken into account.
4. To measure the degree of ‘lack of integration', the mere joinder along one wall cannot be enough to make it an extension. The Tribunal agreed with this point. However, if the internal layout of the new works disclosed no integration with the old hall, they would not have classified it as an extension.
5. The new works were capable of separate function. The Tribunal agreed.
6. The physical appearance of the addition must not dictate what constitutes ‘main access'. The Tribunal approached the definition of ‘main access' according to convenience and not size. Had the Tribunal not found the new works to be an extension, then by virtue of Note 17, zero-rating would have been allowed.

In reaching its conclusion, the Tribunal was strongly influenced by the internal layout. The Appellant’s main argument was that the works were tailored to fit requirements for zero-rating as set out in Public Notice 708.

Particular reliance was placed upon para 3.2.6, which states,

“an ‘annexe’ is a structure which has only minimal physical connection with the existing building…the structure could…abut the existing building along one wall with a connecting door.”

The Tribunal only made the comment that this description could still apply to an extension, and concluded the works were an extension. Furthermore, the counsel for HMRC advised that had the taxpayer approached HMRC at the planning stage, HMRC might have agreed plans so as to give rise to an annexe and not an extension.

Abercych Village Association VTD (20,746)

Tribunal says services from UK subsidiary to US parent cannot be reverse-charged

The Appellant was the UK subsidiary of a global credit card company, and provided services to its US parent. The issue was about whether the services were supplied ‘where received’ under Schedule 5, VATA 1994, or ‘where the supplier belongs’ (i.e. the ‘basic rule’ for place of supply of services). The services involved finance management, project management, facilities management, transaction management, and ‘blue sky thinking’. The Appellant argued these were multiple supplies of Schedule 5 services (consultancy, legal, advisory, accountancy etc) and so were not subject to UK VAT. HMRC argued there was a single supply of management services, all elements of which related to properties of the Amex group in EMEA countries. The Appellant managed and approved lease and real estate transactions, took decisions, but did not provide any advice. It was not, therefore, acting in an advisory or consultancy manner. The Tribunal found for HMRC, using the Levob test to identify that the elements formed, objectively, a single indivisible economic supply that it would be artificial to split. That supply was Schedule 5 for the reasons above. Although the services related to properties, there was no dominant element that related to any specific property, so they were not services relating to land. The Tribunal also considered the customer’s viewpoint, concluding that the customer received a single supply of management services supplied ‘where the supplier belongs’. The Appeal was dismissed.

American Express Services Europe Ltd (VTD 20,744)

Article Added Saturday, 13 December 2008

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