Glasgow School of Art
| Jurisdiction | UK Non-devolved |
| Judgment Date | 23 May 2018 |
| Neutral Citation | [2018] UKFTT 276 (TC) |
| Date | 23 May 2018 |
| Court | First-tier Tribunal (Tax Chamber) |
[2018] UKFTT 0276 (TC)
Judge Anne Scott, Member: Peter Sheppard
Philip Simpson, QC, appeared for the appellant
Mrs Elizabeth McIntyre, Officer of HMRC, appeared for the respondents
Value added tax – One building or two? – One supply or two? – In both cases one economic activity and taxable supply – Insufficient link between rental income and supply – Appeal dismissed.
The First-tier tribunal (FTT) dismissed an appeal by Glasgow School of Art (the Appellant) against a decision by HMRC rejecting a claim to input tax. The FTT found that there was one supply of construction services under a single contract for one building and input tax was not directly attributable to taxable rental income but residual under a partial exemption special method.
The Appellant developed its Garnethill campus demolishing two buildings and substantially re-building a third, known as the Assembly building, retaining facades on three sides with all internal floors and structures removed. Planning approval was also obtained for the erection of a new academic building, referred to as the Reid building, which was effectively wrapped around the Assembly building. Scottish Funding Council (SFC), the funder, stipulated that the minimum standards of the British Research Establishment Environmental Assessment Method (BREEAM) Excellent Standard should be incorporated into the works. The Reid building on its own was unlikely to meet this so a door on the second floor was added to link the buildings.
The Reid building was used for academic purposes and the Appellant leased the Assembly building to the Students Union (SU) for a rent of £5,000 per annum, considerably less than market value The two buildings operated independently and had different opening times with only the sprinkler and air conditioning systems common to both.
From construction and for some time afterwards, the Appellant referred to the Reid building in respect of all works, submitting an option to tax in August 2014. However, in August 2015 the Appellant's agent informed HMRC that the Assembly building was a building in its own right. The earlier option to tax was intended for the Assembly building as it had charged and accounted for Value added tax (VAT) on rental income. Later following a visit HMRC took a view that that the door on the second floor linking the buildings was more than a fire exit and it now viewed the site as one building.
The Appellant submitted a voluntary disclosure in February 2016 claiming that input tax, originally treated as residual under the partial exemption special method in place, should have been fully attributable to the taxable supply of rental income in the Assembly building. HMRC then queried the Appellant's January 2016 VAT return which included a large repayment claim. Following correspondence HMRC rejected both claims.
The Appellant had two arguments, firstly the Reid and Assembly buildings were two separate buildings and there were separate supplies. Secondly the lease to the SU was taxable and the Appellant is therefore entitled to credit of input tax in respect of that supply.
HMRC said there was one supply of construction services at the time of construction and the second-floor door confirmed access between the buildings. The SU rental income was not an economic activity and overall the costs incurred in the Assembly building were attributable to all the Appellant's activities. The time of supply was when the works took place and not when the contractor issued revised invoices and credit notes.
The FTT concluded on the balance of probabilities that there was one building with an internal link, see para. 99 of the decision. However, was there one supply or two? It then Considered the economic viewpoint, see Card Protection Plan Ltd v C & E Commrs [1994] BVC 20 and Levob Verzekeringen BV v Staatssecretaris van Financiën (Case C-41/04) [2007] BVC 155. There was always a single delivery strategy encompassing both buildings concurrently under a single contract, see R & C Commrs v Newey (t/a Ocean Finance) (Case C-653/11) [2013] BVC 259. SFC funding requiring the buildings be linked was an important aspect of the contract and VAT was not disputed until after completion and when the buildings were occupied. Only after it had unsuccessfully tried to reclaim VAT did the Appellant approach its contractor and request credit notes and new invoices, it could not change the nature of the supply, see para. 111 and 112.
The FTT also considered the position if it was wrong and there were two buildings and two separate supplies, see R & C Commrs v Findmypast Ltd [2017] BVC 38 following a review of CPP and Levob, that a range of factors must be considered including contracts and economic context. It concluded that the arrangement with the SU was not an economic activity given the low level of rent, see para. 122.
The appeal was therefore dismissed.
Despite the discussion over the buildings the real issue was whether there were one or two supplies. From case law the FTT analysed the wider issues and factors involved in establishing the economic reality. At the time of supply there was one contract in respect of the whole project and the Appellant could not undo that fact by claiming later that there had been a separate supply in respect of one aspect of the contract.
[1] The decision of the respondents (“HMRC”) dated 13 February 2017, which is the subject matter of this appeal, concerned the period 01/16 VAT Repayment Return which resulted in a net claim of £405,301.07 and a VAT 652 error correction notice which amounted to a claim for £65,778, both of which were rejected by HMRC. HMRC's final position, as set out in a letter of 23 February 2017, was to raise an assessment under section 73 Value Added Tax Act (“VATA”) 1994 in the sum of £96,525.74.
[2] Effectively HMRC refused the appellant's claim for full deduction of Value Added Tax (“VAT”) on the construction works at the Garnethill campus carried out on the area of the Reid Building known as the Assembly Building. That had been claimed on the basis that the appellant was entitled to credit for input tax it had incurred on refurbishment of the Assembly Building; that was input tax on a supply that the appellant argues was to be wholly used for making taxable supplies.
[3] At the heart of this appeal is the issue that at the time of the construction works and for a period thereafter, the site, being the entire construction works, was described by the appellant as the Reid Building and it is only latterly that the appellants argue that there are two buildings. By contrast, as can be seen below, in March 2015, HMRC argued that the Reid Building and the Assembly Building were separate buildings but latterly, and currently, argue that the whole site is one building.
[4] For the purposes of this decision we describe the area of the site occupied by The Glasgow School of Art Students Association SCIO and GSASA Limited (together “the Students' Union”) as the Assembly Building and the area occupied by the appellant as the Reid Building, albeit routinely the whole site has been referred to as the Reid Building by the appellant and others.
[5] It was agreed that the decision of the Tribunal would be a decision in principle only.
[6] The appellant, which was established in 1845, is a Higher Education Institution Art School specialising in Fine Art, Design and Architecture.
[7] The Assembly Building which had an entrance in Renfrew Street was constructed in or around 1936. It is a Category C listed building on the Garnethill campus. The whole campus sits within the Glasgow Central Conservation area and is therefore subject to development control. Since approximately 1980 it had been used by the Students' Union providing facilities for the student body including a bar, music venue and exhibition space. Adjacent to it there were two other buildings, namely the Foulis and Newbery Buildings which were used for the appellant's educational purposes. Prior to the construction works, the Assembly Building was in a worse state of repair than the other two buildings which were linked to each other.
[8] In 2003, the appellant conducted an Estates Strategy Review which concluded that, with the exception of the original Mackintosh Building, a major redevelopment of the Garnethill campus was required. Phase 1 of the redevelopment was the site opposite the Mackintosh Building comprising the Assembly, Foulis and Newbery Buildings. It was not considered feasible to redevelop just part of that site and it was always planned to have a single delivery strategy.
[9] The original internal deliberations had proceeded on the basis that all three buildings would be demolished and there would be a dedicated space within the new build that would allow the Students' Union to function independently. The Brief from the students dated 22 March 2010, and subsequently utilised by the architects, specified that there should be no functional connection to the rest of the Phase 1 building.
[10] The quantity surveyor cost consultants working on the project, Turner & Townsend, were requested to review the cost comparison between the refurbishment of the Assembly Building and the possibility of the space requirements of the Students' Union being incorporated in a totally new build option. Refurbishment was found to be the better value for money option.
[11] The winning architect design team for the project proposed retaining much of the external structure of the Assembly Building and refurbishing the whole interior and a new building, which was ultimately named the Reid Building, would be cantilevered above what remained of the Assembly Building. Effectively the Reid Building is wrapped around and above the Assembly Building. The Reid Building is independently supported for structural...
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