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

{mosimage}VAT Tribunal says ‘Lennartz' principle applies to refurb of existing assets, not just the creation of new ones

The dispute in this appeal was whether the Lennartz principle applies when a taxable person carries out extensive reconstruction work to an existing building.

The Lennartz ECJ decision established that a taxable person may take initial input tax deduction on the full cost of goods purchased as a business asset, and then recognise a corresponding obligation to account for output tax on the private use of the goods. In this case, the Appellant, a charitable art gallery, argued that it was entitled to recover all the input tax incurred on the conversion work on a former library which adjoins its building.

As a charity, the Appellant primarily displays works of art for free, which is not a business activity. It also makes taxable supplies, and had opted to tax the premises on the basis of making taxable supplies in the refurbished part of the building. The appeal was not against any particular repayment claim or assessment, but against a decision outlined in a letter from HMRC stating that the Lennartz principle could not be applied in this case.

Whilst most of the refurbishment work qualified for zero-rating as an ‘approved alteration’ to a listed building used for a relevant charitable purpose, it was the small proportion relating to works of non-business areas to which the question of eligibility of Lennartz applied.

HMRC argued that for Lennartz to apply, it is not sufficient that the expenditure is capital in nature; the construction work should create an entirely new asset. Interestingly, the Appellant commented that if the appeal was not successful on the grounds that the expenditure produced a capital good to which Lennartz applied, the Tribunal should stay the proceedings until the outcome of a Dutch ECJ case, Vereniging Noordelijke Land-en Tuinbuow Organisatie, which questions whether Article 6.2 of the Sixth Directive is limited to capital goods.

However, the Tribunal was in agreement with the Appellant's reliance on the proposed new Article 168a (previously 17 2.(a)) to be inserted into the VAT Directive. This stipulates that Lennartz can also apply to the expenditure on extensive renovation work that is on a par with expenditure on the acquisition or construction of immovable property.

The Tribunal found no support for HMRC's proposition that the application of Lennartz is confined to new acquisitions by purchase or construction of a wholly new asset or building.

Whitechapel Art Gallery (VTD 20,720)

Tribunal says scaffolding hire comprises two separate supplies at different rates

The Appellant provides scaffolding services to the building industry. The services provided can be broken down into an eight-stage process from initial erection through to alterations, amendments, and movement through to final dismantling.

The Appellant said it was making a single zero-rated supply of its services, but HMRC argued that the possession of the scaffolding passed to the customer, creating two separate supplies; one a zero-rated supply of erection and dismantling; the other a standard-rated supply of the hire of equipment.

Interestingly, the Appellant does charge VAT on the invoice relating to work that overruns the contract period.  It admitted this work is no different from that carried out in the agreed period. However, the Tribunal Chairman did not dwell on this point when determining the correct legal treatment of the supplies, merely dismissing it as illogical.

The Appellant’s argument focused on its belief that the facts of this case were identical to those in GT Scaffolding Ltd (GT). In GT, the Tribunal had held that the “possession” of the scaffolding did not pass to the customer, and hence the supply in question was zero-rated. In the Appellant’s view, the fact that its terms and conditions stated that the customer was not allowed to alter or adapt the scaffolding structure, combined with a continuing site presence of the Appellant’s workforce, was inconsistent with transfer of possession.

The Tribunal disagreed, however, finding that its customers did effectively acquire exclusive use and de facto control of the scaffolding. Despite the fact that the Appellant’s staff are on site most of the time carrying out adaptations, as in R&M Scaffolding, the point is stressed that the Appellant has no physical control over the use to which the scaffolding is put by the customer.  The Tribunal concluded that there was a transfer of possession of goods. Therefore, there were two distinct supplies, and HMRC was correct to apportion the price between the two items.

Pharaoh Scaffolding (VTD 20,741)

Tribunal says that residual subscriptions of non-profit membership body are taxable

The dispute in this appeal concerns the correct VAT treatment of the ‘residual subscription income’ of a not-for-profit representative national body concerned with conservation and shooting. 

It was common ground that each subscription received by the Appellant was attributable to both a zero-rated supply of magazines and an exempt supply of ‘making insurance arrangements’. However, HMRC disagreed with the Appellant’s contention that the ‘residual subscription income’ should be treated as exempt.

In 1994, the Commissioners ruled that the supply was exempt, but in 2006, the decision was altered, and the Appellant was told that the residual subscription must be treated as the payment for a taxable supply. The Appellant disagreed, and, in April 2007, HMRC raised an assessment for £397,551.

The Appellant argued that the payment is exempt, as the residual subscription falls within Sch 9, Group 9(1), VATA 1994, or failing that, Sch 9, Group 10(3). The first grants exemption to ‘a body which has objects which are in the public domain and are of a political, religious, patriotic, philosophical, philanthropic or civic nature’. The second exempts ‘the supply by an eligible body to an individual, except, where the body operates a membership scheme, an individual who is not a member, of services closely linked with and essential to sport or physical education in which the individual is taking part.’
 
It was concluded that, although conservation and other public-spirited activities represent a substantial part of what the Appellant does, the fact that they did not constitute its primary aim was inescapable. The Appellant’s mission statement and material sent to its members clearly state that it is a representative body for sporting shooters, and its other activities are subordinate to that main aim. It followed that exemption could only apply if its principal aim of representing members’ interests could be said to be of a political, philanthropic or civic nature, and in the public interest.  As the supply could not be said to fall in either of those categories, the appeal was dismissed.

The British Association for Shooting and Conservation Limited (VTD 20,739)