Commissioners of Customs and Excise v Wiggett Construction Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 18 May 2001 |
| Date | 18 May 2001 |
| Court | Value Added Tax Tribunal |
VAT Tribunal
The following cases were referred to in the decision:
BLP Group plc v C & E Commrs VAT(Case C-4/94) [1995] BVC 159
Royal and Sun Alliance Insurance Group plc v C & E CommrsVAT[2000] BVC 407
Tremerton Ltd v C & E Commrs VAT[2000] BVC 3
Input tax - VAT paid by the appellant on the purchase of land - Land sold to housing association - Contract with the housing association to build flats on the land - Interpretation ofSI 1995/2518 section 108reg. 108 of the Value Added Tax Regulations 1995 (SI 1995/2518) - Whether input tax wholly attributable to the exempt sale of land.
The issue was whether input tax incurred by the appellant on the purchase of property, and subsequently recovered as input tax, should be repaid to the commissioners as being attributable to the exempt disposal of the property or should be apportioned to reflect the improvements arising from the construction of buildings by the appellant.
The appellant was a property developer whose stock-in-trade was housebuilding. The bulk of its construction work was carried out for public bodies, such as local authorities, and about 40 per cent of its work consisted of constructing dwellings for private sale. The company identified a development site in Manchester city centre close to the Chinatown area and approached Tung Sing Orient Housing Association Ltd, which serves, in particular, the Chinese community resident in Manchester. Having established the potential requirements of the housing association, the appellant obtained planning permission to develop the site with units of social housing and subsequently purchased the property for £335,000 plus VAT. Following a delay of 12 months, four agreements were entered into by the appellant and the housing association: (1) a land sale agreement; (2) a building contract for the construction of 45 flats by the appellant; (3) a variation agreement; and (4) a separate building contract for the construction of an additional 12 flats. The total consideration for the contracts was £2,452,290. It was the commissioners' case that there was no connection between the sale of the land by the appellant and the building works. In their view, the input tax incurred on the purchase of the land by the appellant was attributable to the subsequent exempt sale and was, therefore, non-deductible. The appellant argued that the exempt sale was dependent upon agreement by the housing association that the appellant would carry out the building works.
Held, allowing the company's appeal:
1. The relationship must be considered between SI 1995/2518 section 108reg. 108 of the Value Added Tax Regulations 1995 (SI 1995/2518) and eu-directive 77/388 article 20(1)art. 20(1)(b) of Directive 77/388, the sixth VAT directive. The article provides for adjustment to the initial deduction of VAT where, after the return is made, some change occurs in the factors used to determine the amount to be deducted. One of those factors is the extent to which inputs are attributable to taxable or exempt supplies.
2. The only real change in the factors was the exempt supply of property to the housing association. The appellant never had the intention of disposing of the property undeveloped: the intention at the time of purchase was to make taxable supplies and that intention was fulfilled when the property was disposed of. If the property was sold for a consideration that contemplated the construction works being carried out, then the time of construction was a matter of mechanics rather than substance.
3. Regulation 108 should be applied on the basis that the appellant made both taxable and exempt supplies and input tax should be deducted accordingly.
[The tribunal set out the facts summarised above and continued as follows.]
15. On 23 December 1996, agreement was reached. All four agreements were signed at that time on behalf of the appellant and the housing association, although the Joint Contracts Tribunal ("JCT") agreements were left undated. I was told that this was because the housing association wanted to receive the official approval of its board in relation to those agreements; however it is not clear to me why the board should not simply have ratified those agreements subsequently, if all the agreements had been dated 23 December 1996.
16. Be this as it may, I find that all four agreements were entered into on 23 December 1996 and that the signatories thereto on behalf of each of the parties had authority in that regard. I find that the first agreement in Clause 1.2(a) thereof expressly referred to the second agreement and the fourth agreement and that that subclause confirms that all those agreements were arrived at on 23 December 1996. I also find that the third agreement was for the variation of the second agreement by the fourth agreement, being concerned, as appears from Clause 2 of the third agreement, with the specification of the works to be carried out to the property by the appellant in consideration of the sale of the property. I conclude from reading all the agreements that they formed an integral "package" and that they together constituted the bargain struck between the parties on the last working day of 1996.
17. The consideration expressed in the first agreement was £430,000. The second agreement was for works at a cost of £1,618,500. The third and fourth agreements provided for additional works costing £403,790.
18. I am satisfied that the appellant would not have entered into the first agreement but for the construction works agreed and provided for by the other three agreements. The property was prime development land, bought for only slightly less than the consideration expressed in the first agreement, and the appellant was in business to develop that land for profitable disposal as so improved. A "turnkey" development remained a solution for the disposal of the property in 1997 if the housing association did not agree in the terms it did before Christmas 1996. The appellant only sold the property to the housing association because of that agreement, central to which was that the appellant would build the dwellings on the property.
19. The appellant retained possession of the property for the purpose of carrying out the construction work agreed and on completion of design studies it commenced the work. The first interim stage payment for the work was received about Easter 1997. The project proceeded satisfactorily to completion. The appellant was paid all that it was due under the contractual arrangements.
20. It is common ground that the sale of the property to the housing association was an exempt supply, within Value Added Tax Act 1994 schedule 9 group 1item 1 of Grp. 1 of Sch. 9 to the Value Added Tax Act 1994 ("the Act"), and that the construction works fell to be zero-rated under Value Added Tax Act 1994 schedule 8 group 5item 2 of Grp. 5 of Sch. 8eu-directive 77/388 article 20(1) to the Act.
21. The input tax treatment of the transaction came to light in November 1998 when Ms Akpinarlioglu performed a routine VAT inspection call on the appellant. She took the view that there was no connection between the disposal of the property to the housing association and the construction works. As she saw it, the disposal exhausted the tax treatment of the property, so that the input tax claimed by the appellant on purchasing the property was all repayable in light of the exempt sale to the housing association. The construction works were subsequent and irrelevant to the operation of SI 1995/2518 section 108reg. 108 [of the Value Added Tax Regulations 1995 (SI 1995/2518)]. She attached importance to the invoices for the land sale and construction works respectively, which were distinct.
22. As Ms Akpinarlioglu appreciated the position, once the appellant had disposed of the property a line must be drawn under the transactions, so that no subsequent supplies, that is to say the construction works, would be germane to the operation of the regulation. However, I am satisfied that Ms Akpinarlioglu did not understand the link between the sale and construction agreements on the facts of this case. She thought that there was no link, either of law or fact. When asked by Miss Birtles [for the commissioners], "Did the...
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