Sunnyside Property Company Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 22 August 2013 |
| Neutral Citation | [2013] UKFTT 447 (TC) |
| Date | 22 August 2013 |
| Court | First Tier Tribunal (Tax Chamber) |
[2013] UKFTT 447 (TC)
Judge John Clark, James Midgley.
David Moll, DKS VAT Specialist, appeared for the Appellant
Owain Thomas of Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Value added tax - refurbishment of nursing home premises - lease of premises by company to subsidiary - services provided under separate agreement - whether single exempt supply of property together with services or independent supplies of property and services - held, single composite exempt supply of property and services - similar conclusion on basis of manner in which arrangements implemented in practice - deductibility of input tax - held none of input tax on construction costs attributable to taxable supplies - appeal dismissed.Procedure - application for late admission of appeals granted and some appeals consolidated with main appeal.
The First-tier Tribunal dismissed the taxpayer company's appeal against HMRC's decision that it was making a single exempt supply arising from the grant of a lease to, and facilities agreements with, its sister company, whose business as a nursing home was exempt from VAT under the Value Added Tax Act 1994 ( 'VATA 1994' ), Sch. 9, Grp. 7. In the opinion of the tribunal, the agreements lacked commerciality and did not reflect economic reality. Thus, the split between the supply of the property and the supply of services was artificial. The only taxable supplies made by the taxpayer were those of food, medical supplies and consumables outside of the facilities agreements and as the refurbished nursing home premises were not needed in order to make those supplies, there was no direct and immediate link between the construction costs and the taxable supplies made. Thus, the input tax relating to the construction costs was not deductible in calculating the taxpayer's net VAT liabilities.
The taxpayer was part of a VAT group ("TGL") and was incorporated to separate the freehold properties from the operating income to reduce the group's exposure to a large compensation claim. On 13 April 2006, the taxpayer's director ("Mr G") applied for its voluntary VAT registration. In that application, he stated that the taxpayer's business comprised of exempt rental of property, standard-rated facilities charge and supply of food (a mixture of standard and zero-rated supplies).
With effect from 1 April 2006, the taxpayer and its sister company ("SPNH") entered into a formal written lease in respect of the property used for SPNH's nursing home business. They also entered into a facilities agreement with effect from the same date. On 3 April 2006, the property was redeveloped. On 1 April 2008, the property was handed over to the taxpayer, subject to "snagging" items under the building contract. It further entered into two facilities agreements with SPNH in 2008 and 2010, respectively.
The taxpayer submitted its first VAT return for the period September 2006 and claimed a large repayment. HMRC denied the repayment on the ground that its supply of the lease of the property, kitchen equipment and utilities were a single composite supply. The taxpayer appealed against the decision. It contended that there were two separate agreements, a lease agreement for the bare rental of the property (exempt supply), and a facilities agreement for various additional services (taxable supplies). There was a direct and immediate link between the refurbishing of the property and its taxable supplies.
HMRC contended that the taxpayer's letting of the property to SPNH was an exempt supply. As both the taxpayer and SPNH made exempt supplies, neither was in a position to recover input tax. The purpose of splitting the letting of the premises and the provision of facilities at the property was to achieve a taxable income stream for the taxpayer to provide for input tax recovery on the refurbishment costs of the premises. It was a common ground that regardless of the position concerning single or multiple supplies, the costs of the refurbishment project had a direct and immediate link with the exempt supply of the letting of the premises. Thus, the taxpayer would need to establish that there was a direct and immediate link with one or more taxable supplies which it made.
The Tribunal held that the arrangements between the taxpayer and SPNH were dealt with on a very informal basis, as shown by the absence of written lease documentation. As confirmed by the various accounts of the taxpayer, SPNH, and TGL included in the evidence, the companies in the TGL group were "related parties". The companies in the TGL group did not operate on commercial arm's length terms. The activities of the taxpayer and SPNH were largely directed by Mr G.
SPNH's business as a nursing home was exempt under VATA 1994, Value Added Tax Act 1994 schedule 9 group 7Sch. 9, Grp. 7, item 9(b); hence, any VAT which it incurred was likely to prove irrecoverable. Thus, any arrangement, under which supplies to it were taxable supplies, would be added to its irrecoverable input tax. Separate provision of facilities under the facilities agreement, which might otherwise have been provided as part of the exempt supplies under the lease, would result in a disadvantage to SPNH. Under the 2006 facilities agreement, the provision of "kitchen" appeared to have that result. Under the 2008 and 2010 facilities agreements, that appeared to be the case for "kitchen equipment usage" and "furniture and equipment usage". If SPNH had been negotiating at arm's length, it would have wished to take into account any such potential disadvantages before agreeing the terms of the lease and the facilities agreements. The arrangements lacked commerciality, and did not reflect economic reality. Thus, the split between the supply of the property under the lease and the supply of services under the facilities agreements was artificial and those supplies constituted a single composite supply.
On that basis, the only taxable supplies being made by the taxpayer were those of food, medical supplies and consumables outside the facilities agreements. There was no direct and immediate link between those supplies and the costs of refurbishing the building. The taxpayer did not need to use the building in order to make those supplies to SPNH. Furthermore, the only basis on which the taxpayer could have been using the building for such purpose would have been pursuant to the lease which permitted SPNH as tenant to share occupation with a group company. As the supply of the premises under the lease was an exempt supply, that broke the chain (Abbey National plc v C & E CommrsECAS (Case C-408/98) [2001] BVC 581 ("Abbey"), considered). Thus, the input tax relating to the construction costs was not deductible in calculating the taxpayer's net VAT liabilities.
It was established in the case of BLP Group plc v C & E CommrsECAS (Case C-4/94) [1995] BVC 159that VAT on expenditure can normally be recovered only if it is incurred for the purpose of making taxable supplies and there is a "direct and immediate link" between the underlying costs and the taxable supplies made. In this case, the tribunal found no such link between the building works and taxable supplies. For commentary on the principle of "direct and immediate" links, see the CCH VAT Reporter at 19-450.
[1]The Appellant ("SPCL") appeals against a decision by the Respondents ("HMRC") that SPCL was making a single exempt supply arising from a lease and facilities agreement and that VAT incurred on construction services and utilities was directly attributable to such exempt supply. The effect of this decision was to deny relief for input tax incurred by SPCL. SPCL also appeals against a series of assessments made in accordance with that decision.
[2]The evidence consisted of four large lever-arched files containing documents, as well as witness statements given by Khaled Gamiet and Stephen Aldcroft. Mr Gamiet also gave oral evidence; although it was proposed that Mr Aldcroft should also give oral evidence, it was agreed between the parties at the hearing that his witness statement should stand as evidence without need for additional oral evidence. From the evidence we find the following background facts.
[3]SPCL was registered for VAT with effect from 3 April 2006. On its application for registration, SPCL described its business as "rental of property, facilities charges and sale of food".
[4]SPCL is part of a group of companies controlled by the Gamiet family. In 1984 Mrs Gamiet started operating a nursing home business with the opening of the Sunnyside Private Nursing Home in Iver, Buckinghamshire. The property was owned and operated as a nursing home by Sunnyside Private Nursing Home Ltd ("SPNH"). SPNH began operating with seven residents but this increased over time to 32 registered places by the time of a valuation made in 2003 (see below). Several of the rooms in the home were shared.
[5]In 1992, a second home, Langley Nursing Home was opened. The freehold property was owned by SPNH and the nursing home was operated by a limited company, Langley Nursing Home Ltd ("LNH") registered on 6 May 1992.
[6]At the end of 2002, a decision was taken to restructure the existing arrangements. A VAT advice letter written in early 2006, long after the event, suggested that the property companies had been set up "to separate the freehold properties from the operating income to reduce the group's exposure to a large compensation claim that could be funded through the sale of the properties". As we had no specific evidence concerning the reasons for the restructuring, we make no findings in respect of the reasons.
[7]A holding company called Trustworth Group Limited ("TGL") was incorporated on 14 April 2003.
[8]Three property companies were also formed. Langley Property Company Ltd was...
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