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Andrew Needham, director of VAT Specialists Ltd, highlights a selection of recent VAT cases

Tribunal finds partly for taxpayer on supply of indoor pool covers for new houses

This case concerned the supply of (optional) retractable insulated covers and moveable floors for indoor swimming pools.  The basic position is that the construction of an indoor pool in a new house can be zero-rated under VATA 1994 Schedule 8 Group 5 Item 2. 

The Appellant argued that the covers and floors were zero-rated under Group 5 Item 4, as they fell within the definition of ‘building materials’ in Note (22) of Group 5. HMRC said the covers were electrical appliances, which are excluded from zero-rating, and that the floors were not ‘ordinarily incorporated’ into a building, and so were similarly excluded.

At hearing, the Tribunal saw the electrically-powered, fully-retractable insulated swimming pool covers as ‘building materials’ because the covers were built into the pool structure; and were ‘ordinarily incorporated’ within new indoor swimming pools (the Tribunal noted that in Leisure Contracts Limited (VTD 19,392), these covers are often required under building regulations). HMRC argued the point that electrical appliances are excluded from zero-rating. However, the Tribunal concluded that “it is purely incidental to their description that they are electrically powered”, making the analogy that “curtains are curtains even though some in offices and luxury houses may be drawn electrically”.

The moveable floors, a new and interesting invention designed to enable the level of the swimming pool floor to be altered to create varying depths, was regarded as an exceptional item not ‘ordinarily incorporated’ in buildings of any description. To that extent, the appeal was partly allowed.

Rainbow Pools London Limited (VTD 20,800)

Tribunal finds that option to tax was not subject to the HMRC anti-avoidance measure

The Appellant wanted to acquire a self-storage facility. The vendor had opted to tax the building but the Appellant did not want to opt to tax as it wished to keep its charges to customers down. In order to acquire the building VAT-free under the TOGC rules (the vendor also operated a self-store business from the site) The Appellant would have to opt to tax. Therefore, it sought to create the conditions under which the vendor’s option to tax would be disapplied by the anti-avoidance rules, as that was the only way for it to achieve its aim of acquiring a VAT-free building without having to opt to tax and charge its customers VAT.

The Appellant’s plan involved making the building a capital goods scheme asset that would be occupied for exempt purposes by the vendor, financier of the development or someone connected with either. As the Appellant and the vendor were not ‘connected’, the only way to do this was to make it the financier of a capital refurbishment of the building by the vendor that was subject to VAT and cost over £250k, and hence would bring the building within the capital goods scheme. The Appellant would be in occupation of the building for exempt purposes. Both parties were keen that the business should not be disrupted during the refurbishment process.

The Appellant was granted a licence to occupy the premises, free of charge, before the works were carried out. At that stage, the vendor was no longer running the storage business, and the income from it went to the Appellant. The freehold of the building was sold a few days after the refurbishment was completed. The works were carried out to meet the Appellant’s specifications on Fire and Health and Safety matters.

The Appellant argued the disapplication conditions were met as it had financed the development, which had cost over £250k, and the intention was that the building would be occupied for exempt purposes. HMRC argued that the disapplication conditions were not met. The expenditure did not create a capital item that was used in the course of the vendor’s self-storage business. The expenditure was incurred to sell the property, it was not a cost component of any supplies of self-storage by the vendor, and it was incurred after the vendor had ceased to operate a self-storage business. It was also not capital expenditure as the refurbishment was not a durable asset. This last comment raises some interesting questions in its own right.

The Tribunal agreed with HMRC. It is unusual to see HMRC arguing against its own anti- avoidance rules. This is a long case, but it is interesting. The Tribunal accepted that there is a subjective and an objective test for the disapplication. The objective test is whether the asset is a capital item in a capital goods scheme (CGS). The subjective test is whether the intention is that it will become a capital item within CGS (in both cases there must also be significant exempt or non-business use of course). HMRC did not pursue any abuse arguments, and withdrew the misdeclaration penalty it had issued, (no reason for this is given). HMRC also accepted that the sale of the other business assets could be a TOGC, so VAT was only due on the building.  The appeal was thus dismissed.

Shurgard Storage Centres UK Ltd (VTD 20,797)

Tribunal says roofspace in block of flats is eligible for 'non-residential' treatment

A short but interesting case involving an appeal by a developer against HMRC’s refusal to grant voluntary VAT registration.

The Appellant applied for VAT registration on the basis that it intended to make zero-rated supplies by constructing new flats within the roofspaces of blocks of flats, and then granting a ‘major interest’ in each new flat. However, HMRC refused its application to register for VAT, arguing that the roof space being converted was integral to the residential part of the building, and therefore the sale of the new flats was an exempt supply.

On the face of it, you might reasonably think that HMRC had a fairly good case here, but the Tribunal found strongly in favour of the Appellant. It took the view that the Appellant was actually converting a ‘non-residential’ part of a building into a number of dwellings within the meaning of VATA 1994 Schedule 8 Group 5 Item 1(b).

Merlewood Estates Ltd (VTD 20,810)