The application of VAT to property

The High Court and the VAT and Duties Tribunal have each handed down important judgments on the application of VAT to property.

In SEH Holdings Limited v Customs & Excise, A sold a property to B who sub-sold the property to C. A had opted to tax the property but argued that VAT was not chargeable because C intended to convert the property into new dwellings. Under the Value Added Tax Act 1994 the election to waive exemption does not have effect where the building sold is intended for use as a dwelling or number of dwellings. Customs & Excise argued that VAT was payable because it was the intention of B (and not C) that was relevant in determining whether A’s election applied. As B did not intend to use the building as a dwelling or a number of dwellings (B immediately sold the building on to C), the election had effect. The VAT Tribunal ruled in favour of Customs & Excise holding that the VAT status of the supply made by A could only be determined by looking at B’s intended use of the property. The Tribunal decision can be criticised. The requirement to look at the immediate purchaser’s intention has merit but the requirement that the immediate purchaser must itself use the building as a dwelling is questionable. But for this decision it would have been a reasonable assumption that the option to tax would not apply if a seller’s immediate purchaser intended that the building was to be used as a dwelling albeit by a third party.

A further interesting point dealt with by the Tribunal was the question of whether a seller must be aware of a purchaser’s intention if the option to tax is to be disapplied. This is an important issue for a seller not least because the disapplication of the option to tax may have input tax implications. The Tribunal concluded that the seller must be aware although there would seem to be nothing specific in the legislation that requires this.

In Royal Sun Alliance Group plc v Customs & Excise RSA sub-let a number of properties which had previously been occupied by companies within its VAT group. RSA incurred VAT on rents that it or companies within its group paid to the superior landlord. RSA sought to recover VAT paid on the rents paid to the superior landlord during the period commencing with the date on which the properties became unoccupied and ending on the date the properties were sub-let and RSA opted to tax the properties. Whilst Customs & Excise accepted that VAT incurred on the rents payable under the superior leases from the date the option to tax was exercised could be recovered Customs & Excise argued that the VAT incurred in the period during which the properties were unoccupied could not be recovered as the VAT was not attributable to taxable supplies made by RSA. The High Court ruled in favour of RSA applying Regulation 109 VAT Regulations 1995 and general principles of EC law. This is a decision of some importance as Customs & Excise have over the last year or so been taking the line that VAT incurred on unoccupied properties prior to the option to tax being exercised could not be reclaimed. The High Court has given a clear ruling that the VAT incurred during the unoccupied period before the option to tax is exercised is attributable and directly linked to the taxable rents subsequently collected and is therefore recoverable.