VAT – SPVs-Recovery of Input Tax

Introduction

This case should be useful to all those taxpayers who, prior to the new VAT on Property rules, set up Special Purpose Vehicles (SPVs) to facilitate the recovery of input VAT which would otherwise not have been available.

The Facts

Community Housing Association Ltd (“CHA”) was a registered social landlord engaged in the provision of social housing. As part of this activity, it acquired new sites and built residential units.

Prior to 2006, CHA carried out these construction projects itself. It engaged surveyors, architects, planning consultants and so on to obtain planning permission for and to design and construct such projects. CHA paid VAT in respect of the fees of such persons providing services to it. CHA also engaged building contractors to build the residential units comprising such projects, but paid no VAT in respect of their services, because they were zero-rated. CHA used the completed units as part of its rental stock. Provision by CHA of social housing for rent involved CHA making exempt supplies of services, with the result that the input VAT paid by CHA in relation to the professionals’ fees for such projects were not recoverable by CHA.

In early 2006, CHA decided that a more effective and tax efficient structure should be used to provide it with new housing from development projects. It set up CHA Ventures Ltd (“Ventures”) to undertake all future development activity on CHA's sites. Ventures contracted with CHA as a property developer, to take over and carry on existing construction projects and undertake new projects on land owned by CHA. The tax advantage of this arrangement in terms of VAT was that Ventures provided zero-rated supplies of design and build services to CHA and it was able to recover all input VAT paid on services used to provide such supplies to CHA. CHA also “transferred” to Ventures all construction projects which it had in hand, but which were unfinished, as at 1 February 2006. CHA made a claim for recovery of £458,428.15 of VAT paid by it in respect of various services provided to it in relation to certain housing construction projects originally carried on by it, but later transferred to Ventures, for completion.

HMRC did not accept the validity of that claim. The VAT Tribunal dismissed CHA's appeal. CHA then appealed to the High Court.

The Issue

Whether input VAT incurred prior to the setting up of a special purpose company was in effect deductible by the original company after construction projects (which has been commenced, but not completed; and in respect of which the professional fees had been incurred) has been transferred to the new company, i.e. whether the supply to the new company was VATable, the professional services were incurred in connection with that supply and hence the original company could reclaim the input VAT paid.

The Decision

The High Court found in favour of the taxpayer, i.e. the input VAT was allowable.

It is important to get into the crux of the judgment in order to truly understand this decision.

In 2006 the benefit of various contractual arrangements CHA had with building contractors and professionals in respect of each development project was assigned by CHA to Ventures. Thereafter, Ventures was entitled to call for any further performance required from building contractors or professionals under those contracts. Ventures paid consideration to CHA for the benefit of the assignment of these contracts, in sums equivalent to what CHA had previously paid the building contractors and professionals for their services. HMRC contended that the payments made by CHA to professionals in respect of the development projects before the assignments in 2006 were not directly and immediately linked with the supply by CHA to Ventures in the sense required by these authorities, and could not be regarded as a cost component of the supply by CHA to Ventures as required by these authorities.

The Court looked at the commercial substance in order to consider the application of legislation. On that approach, it was clear that the assignment by CHA to Ventures of the benefit of CHA's contracts with building contractors and with professionals in respect of the various construction projects was a supply of services for the purposes of the Act. Since it was not exempt, it was a taxable supply. What Ventures received under the taxable supply by CHA in the form of the assignment of rights varied in value to Ventures depending on how much work had been done in relation to any particular project, and the overall price which CHA would pay Ventures for completing the project (after allowing for payments from Ventures in return for the assignment) would be directly linked to the extent of work already carried out on behalf of CHA.

Accordingly, in the view of the Court, the professional services for which CHA paid prior to February 2006 clearly constituted cost components of CHA's taxable supply to Ventures. The cost incurred by CHA allowed it to make a more valuable supply to Ventures, and charge Ventures a higher price for that supply.

On this basis CHA's appeal was allowed.

The judgment is available online at http://www.bailii.org/ew/cases/EWHC/Ch/2009/455.html.