PGPH Ltd

JurisdictionUK Non-devolved
Judgment Date30 October 2017
Neutral Citation[2017] UKFTT 0782 (TC)
Date30 October 2017
CourtFirst Tier Tribunal (Tax Chamber)

[2017] UKFTT 0782 (TC)

Judge Sarah Falk

PGPH Ltd

Tarlochan Lall appeared for the appellant

Peter Mantle, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents

Value added tax – Option to tax – Whether disapplied VATA 1994, Sch.10, para. 12–17 as exempt land and grantor a developer – Held – Yes – Whether there was an intention or expectation – Held – Yes – Whether parties were connected within CTA 2010, s. 1122 – Held – Yes – Appeal Dismissed.

The First-tier tribunal (FTT) dismissed an appeal by PGPH Ltd (PGPH) against a decision by HMRC disapplying an option to tax because it failed the anti-avoidance test in respect of connected parties.

Summary

PGPH acquired a lease in a property which it then refurbished. PGPH registered for Value added tax (VAT), opted to tax and claimed VAT input tax recovery. HMRC refused a refund because PGPH was not making taxable supplies but later change its reason to one based on the connected party anti-avoidance provisions.

The background involved the relationship between PGPH and Smart Medical Clinics Ltd (SMCL) and two men Mr Parker and Mr Barnes. Mr Parker was an entrepreneur providing serviced accommodation to healthcare providers. Mr Barnes was a chartered accountant with financial acumen in the healthcare sector. He formed SMCL in conjunction with medical practitioners to take over the healthcare facility in the same premises that PGPH had acquired the lease. SMCL was incorporated on the same day as PGPH. Mr Barnes eventually owned 90% of the shares and was a director of SMCL.

PGPH and SMCL held discussions and in correspondence SMCL agreed in principal that it would take out a 12-year lease with PGPH in return for serviced accommodation subject to works estimated at £400–£500,000. The main works were carried out between August and November 2014 and around the start date Mr Parker for PGPH approached Mr Barnes at SMCL requesting a loan. The FTT found inconsistencies in evidence but concluded the loan was for the refurbishment works. Mr Barnes eventually became a director and sole shareholder of PGPH by way of Mr Parker transferring his shareholding. Around this time, Mr Parker also became a director of SMCL and loaned it money for working capital.

The FTT outlined the relevant legislation, supplies of property such as a grant of an interest or a licence to occupy are generally exempt of VAT as per VATA 1994, Sch. 9, Grp. 1, para. 1. VATA 1994, Sch. 10 allows for an option to tax enabling VAT recovery on any associated costs, reflecting the EC provisions in art. 137 of Directive 2006/112/EC. Art. 137(2) allows member states to restrict the use of the option to tax and the UK has enacted VATA 1994, Sch. 10, para. 12–17, as anti-avoidance measures.

The FTT considered the various tests under para. 12–17 starting with the developer test at Sch. 10, para. 13(2) that when the grant to SMCL was made, PGPH intended or expected the works to become a relevant capital item. Value Added Tax Regulations 1995 (SI 1995/2518), reg. 113 – The Capital Goods Scheme (CGS), including works with a value of not less than £250,000 incurred on acquisition, construction, fitting-out, alteration or extension. PGPH argued that the actual works cost less than the CGS threshold of £250,000 and even so PGPH had no knowledge of the CGS and the project could be broken up in phases each less than £250,000. The FTT dismissed this, the evidence was that the works were likely to cost in excess of £350,000, knowledge of the CGS was not an issue and it was one project, see para. 129 of the decision.

Next the exempt land test was considered, see Sch. 10, para. 15(2), again did PGPH or a development financier know that it would become exempt land occupied by a relevant person? There was no dispute that SMCL was a healthcare provider providing exempt services. PGPH said that at the time of the grant it did not expect a connected person or development financier would occupy.

The FTT concluded Mr Barnes was a development financier as per Sch. 10, para. 14, when he made a loan to PGPH in August 2014, see para. 138. The FTT also concluded that Mr Barnes was connected with SMCL by way of CTA 2010, s. 1122, through control as a loan creditor, CTA 2010, s. 450(3)(d) and as a person entitled to control at a shareholder level within s. 450(2)(c) and (3), see para. 156.

Effectively by August, 2014 Mr Barnes was a development financier, SMCL was in occupation and he was connected with SMCL, see para. 158.

Comment

Anti-avoidance provisions were intended to catch arrangements like these where parties are connected and have close business relationships. This was no sophisticated planning arrangement and was always likely to fail once VAT repayment claims were submitted and subject to credibility checking.

DECISION

[1] This is an appeal against a decision by HMRC to refuse input tax credits on the basis that the appellant PGPH Limited (“PGPH”) was not making taxable supplies. Following the consolidation of a number of separate appeals, the periods covered by the appeal, and the amounts at stake for those periods, are as follows:

Return

VAT reclaim (£)

02/14

20,227.09

05/14

20,354.21

08/14

33,299.60

11/14

28,580.62

02/15

28,081.06

05/15

16,772.29

08/15

16,500.29

11/15

20,815.45

Total

184,630.61

(The point at issue in the appeal remains relevant for subsequent periods, but the periods set out in the table are the ones formally included in the appeal.)

[2] As described further below, PGPH was formed to carry on a property business in the healthcare sector. It acquired a lease of a property for use in that business and exercised the option to tax under Part 1 of Schedule 10 to the Value Added Tax Act 1994 (“Schedule 10” and “VATA”). The dispute relates to a grant by PGPH of a right to use the property to a company called Smart Medical Clinics Limited (“SMCL”), following which PGPH incurred expenditure on refurbishment works. Initially HMRC denied input tax credits on the grounds that it was not considered that PGPH was making or intending to make taxable supplies, but in an amended Statement of Case HMRC based their refusal on the provisions in paragraphs 12 to 17 of Schedule 10 having the effect that the option did not apply to the grant to SMCL, so that supplies pursuant to it were not taxable supplies.

The statutory framework

[3] The most relevant provisions of Schedule 10, together with paragraph 113 of the Value Added Tax Regulations 1995 (the “VAT Regulations”) and relevant provisions of the Corporation Tax Act 2010 (“CTA 2010”), are set out in the Appendix to this decision.

[4] The starting point is that grants of interests in, or any licence to occupy, land, generally give rise to exempt supplies for VAT purposes, under Group 1 of Schedule 9 VATA. Leaving to one side grants of “major interests” (freeholds and leases exceeding 21 years), supplies relating to property are treated as supplies of services and, where periodic payments are made, those services are treated as separately and successively supplied, generally at the time when payments are made or if earlier when a VAT invoice is issued (ss5, 6 and Schedule 4 VATA, and regulation 90 VAT Regulations).

[5] Part 1 of Schedule 10 makes provision for a person to “opt to tax” any land. Where the option is effectively exercised then grants made by that person, or by certain associates, in relation to the land at a time when the option has effect do not fall within Group 1 of Schedule 9 VATA. Such grants therefore give rise to standard rated (taxable) supplies.

[6] The option to tax provisions reflect article 137 of Directive 2006/112/EC (the “Principal VAT Directive”), which permits Member States to allow a right of option for taxation in respect of certain supplies, including supplies of land and buildings. Article 137(2) provides that Member States may restrict the scope of this right. The UK has chosen not only to allow an option to tax but also to restrict it pursuant to article 137(2). The domestic law provisions which give effect to this restriction are those in paragraphs 12 to 17 of Schedule 10, entitled “Anti-avoidance”. Their effect is to prevent an option to tax rendering supplies taxable where certain conditions are met. Despite the title, the conditions set out do not include any tax avoidance purpose.

[7] Paragraph 12(1) is the main operative provision. It provides:

A supply is not, as a result of an option to tax, a taxable supply if–

  • the grant giving rise to the supply was made by a person (the grantor) who was a developer of the land, and
  • the exempt land test is met.

Both conditions (a) and (b) are in dispute in this case, that is whether PGPH was a “developer” and whether the “exempt land” test was met.

[8] Paragraph 13 effectively defines developer by describing when a grant is made by a developer for the purposes of paragraph 12. Under paragraph 13(2) this test is met if the land “is, or was intended or expected to be, a relevant capital item” and the grant is made at an “eligible time as respects that capital item”. The remainder of paragraph 13 expands on these concepts. In summary, “relevant capital item” is defined by reference to whether the asset in question falls to be treated as a capital item for the purposes of regulations under s26(3) and (4) VATA which provide for adjustments relating to the deduction of input tax over a period. This is a reference to what is generally known as the Capital Goods Scheme, contained in Part XV of the VAT Regulations. A grant is made it at an “eligible time” if it is made before the end of the adjustment period provided for in those regulations (10 years in the case of land and buildings). The effect of paragraph 13(4) is that the relevant intention or expectation must be that of the grantor or a development financier (as to which see below). Although not explicit in paragraph 13...

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1 cases
  • Moulsdale (t/a Moulsdale Properties) v R & C Commissioners
    • United Kingdom
    • Upper Tribunal (Tax and Chancery Chamber)
    • 12 Marzo 2020
    ...there are no authorities addressing the specific issue in this appeal, the parties cited a number of cases of relevance. PGPH Ltd [2017] TC 06189 (at [ 6]–[9]) provides a clear explanation of the relevant provisions as follows: The option to tax provisions reflect article 137 of Directive 2......

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