Weekly VAT update – 12 December 2017
Novation of property contract and the impact of the VAT status of the supplies
The facts in this First-tier Tribunal case were not in dispute. HCL agreed to buy the offices of Sabre for £2.7 million and contracts were duly signed. Sabre had opted to tax its interest in the property. HCL had intended to convert the property into residential accommodation. However, HCL found a buyer – CCL – who was willing to pay £5.5 million for the property. One option to deal with the situation was to novate the original contract.
Under the novation agreement, HCL transferred all its rights and obligations under the contract to CCL, and all references in the contract to HCL were to be construed as references to CCL. Sabre agreed to perform the contract as if CCL was the original party. The net effect was that Sabre would sell the property to CCL for £2.8 million, and CCL would also pay HCL £2.7 million. HCL issued CCL with two VAT invoices. The first was an invoice for the sale of the interest in the contract made with Sabre. It was for £2.7 million with VAT of £540,000 being charged. The second invoice was for varying the contract for an amount of £25,400 with VAT of £5,080 being charged. HCL changed its view, and decided that VAT was not chargeable and issued credit notes.
HMRC became involved when it discovered that HCL had not, for reasons unknown, paid the £545,080 to HMRC and therefore issued an assessment for that amount. HCL appealed to the Tribunal and argued that the key point was that the Sabre contract was novated not the CCL contract (which remained in existence and was completed by the novation). Consequently, there was no reason why the VAT nature of this supply by HCL to CCL should be any different to the VAT analysis applicable if both contracts had been completed in accordance with the original contracts, which they said would have been exempt.
Counsel for HCL argued that an exempt interest in land can include an equitable or beneficial interest as well as a legal interest. HMRC argued that HCL did not supply a freehold interest, which would have been exempt, but supplied an unexercised contractual right to buy the property from Sabre.
The Tribunal agreed with HCL that it had supplied an equitable interest in the property to CCL. It said that, by the novation, HCL had given up its equitable interest and that Sabre had granted a new equitable interest to CCL which was effectively HMRC’s argument. Therefore the Tribunal concluded that HCL did not supply an interest in land to CCL. Instead, HCL supplied to CCL the right or opportunity through the deed of novation to enter into an agreement with Sabre for the sale and purchase of the property. This was not a supply of goods and so must be a supply of services which will be standard-rated. The original VAT invoices issued by HCL were correct and the VAT assessment upheld. It remains to be seen whether HCL will seek to appeal, which they can only do on a point of law.
Whether VAT on local infrastructure costs for a new village are recoverable by the developer
The CJEU has issued its decision in a Bulgarian case involving a developer having to create various infrastructure works at its own cost. Iberdrola intended to create a holiday village which, once complete, would generate rental income. Before the village could be opened, it would need connecting to the existing communal sewerage system and related works. Iberdrola agreed with the local council that Iberdrola would carry out the required work at its own expense.
Iberdrola subcontracted the work to a building contractor and deducted input tax incurred on the costs on the basis that it related to an intended taxable supply. However, the Bulgarian VAT authorities rejected the claim on the basis that Iberdrola had provided a free service to the local council and that the input tax related to that free, non-business service.
The Advocate General had previously agreed with the VAT authorities but the CJEU has now issued its decision agreeing with Iberdrola. It declared that the right to deduct VAT on the works undertaken on the waste water infrastructure was recoverable if there is a direct and immediate link between the renovation costs and the intended taxable supplies. It considered that, without renovating the waste water infrastructure, the proposed holiday village could not operate and generate taxable supplies. It therefore agreed that there was a direct and immediate link between the costs and the intended economic activity, and that the VAT on the costs was therefore recoverable.