May 2016

The Supreme Court handed down its judgement in the Airtours case last week. This case is the latest in an ever increasing line of case law relating to tripartite VAT recovery.

HMRC were successful in denying Airtours recovery of VAT on the costs incurred on the basis that Airtours was not receiving services under the contract, nor did it contract with PwC to have services provided to a third party. Further, the Court held that the economic reality was reflected in the contract and therefore Airtours could not be seen as receiving a supply on those grounds.

What’s the case about?

Airtours was in financial difficulty and in 2002 it decided to appoint PwC to produce a report for various lending institutions. This report was to be used by the lending institutions to assist with their decision making on whether to extend Airtours’ credit facilities. Airtours was party to the agreement and a beneficiary of the outcome as it would benefit by being able to continue to trade if the lending institutions agreed to support the business. Airtours contracted to pay PwC the costs of producing the report, but it was only entitled to a copy of the report in redacted form. The engagement contemplated that the report was being prepared for the lending institutions.

Airtours recovered the VAT on the invoices it received from PwC. HMRC disagreed with this VAT recovery as its opinion was that Airtours had not received a supply of services from PwC. Only the lending institutions had received a supply.

Following defeat in the Court of Appeal which found for HMRC (2 judges to 1) Airtours appealed to the Supreme Court. The Supreme Court was equally split on the outcome with three judges finding for HMRC and two against.

So does this apply in all tripartite scenarios?

Whilst this means that HMRC were successful in this case and that Airtours will not receive the VAT paid as input tax, the situation where three parties are involved in a supply remains unclear. The Supreme Court has followed the line of thought from various cases that a small difference in fact can alter the outcome of a case. Whilst there is a lack of certainty from this decision it does still give businesses that have assessments from HMRC, or ongoing disputes with HMRC, an opportunity to consider whether, following the Supreme Court’s decision, their fact pattern is distinguishable from Airtours.

We would recommend the following points are considered:

1. In addition to paying for the services (assuming the paying party is trying to recover the VAT), is the contractual position clear that the supplier is under a contractual obligation to the business reclaiming the VAT to provide services to that party? The decision in Airtours indicates that the services do not need to be provided directly to the business recovering the VAT – no doubt this point needs to be carefully considered and hopefully HMRC will express a view on what they think this part of the decision means; and
2. Does the contract reflect the economic reality of what is happening? If not, then the wider economic and commercial reality should be considered to identify whether services have been received.

Is this just relevant to professional costs?

Clearly, the area of legal and other professional costs remains the highest profile tripartite scenario. However, this remains a complex area of VAT law and the ongoing appeals, due to be heard by the Upper Tier Tax Tribunal later this year, in the cases of Associated Newspapers (input tax on vouchers purchased for a business promotion scheme), and U-Drive (input tax on costs of repairing 3rd party vehicles and property damaged by a van and car hire business) indicate that tripartite scenarios can arise in a range of businesses.

Please contact Sean McGinness on 01962 735 350 should you wish to discuss the above in more detail.

This VAT case represents a 17 year old dispute with HMRC which was originally concerned with the VAT liability of Halle’s ticket income – the question of whether the philanthropic VAT exemption applied.  The issue before the Tribunal related to one final point on the VAT status of Halle’s membership scheme.  Halle is a charitable organisation, set up with the aim of “promoting the study, practice and knowledge of the art of music” through its orchestral concerts and education programmes .  In return for an annual subscription, Halle members could receive a number of benefits including corporate rights, priority bookings on concert tickets and publications.

The First Tier Tribunal was asked to consider whether Halle’s supplies of the membership scheme were within the scope of VAT and, if so, whether they fell within the exemption for philanthropic activities.

The FTT concluded that the Halle was making a supply of services (being a package of benefits in return for the membership fee).  The question was whether the services are within the scope of the philanthropic exemption.  VAT exemption applies when a not-for-profit organisation makes supplies to members of services that are in keeping with the aims of the organisation and which are not charged for beyond the membership subscription.  Qualifying organisations include those with objects in the public domain that are of a philanthropic nature.

There is no statutory definition of “philanthropic”.  In HMRC’s view, Halle’s activities were cultural rather than philanthropic as they primarily benefitted those who enjoy classical music rather than being for the “good of all mankind”.  However, the Tribunal noted that the great philanthropists of the 19^th century did not limit their activities to basic provisions such as housing and sanitation but also focussed on the arts and literature and that music should be no different.  The fact that the Halle’s concerts were free or heavily subsidised meant that they wouldn’t be offered by commercial operators, further supporting the philanthropic focus.

This case is relevant to any charity/not-for-profit organisation that provides services to members in return for a subscription.  The case demonstrates that the scope of the term “philanthropy” is wider than HMRC have previously accepted.  It will be of particular relevance to those organisations that host events for members without further charge e.g. conferences/concerts etc. both in the UK and overseas.  However the exemption is unlikely to apply where a separate and additional charge is made for entrance to an event, even if by a not-for-profit body.

HMRC has clarified its policy on zero-rating and reduced-rating for projects carried out under permitted development rights.

Business Brief 9/2016 clarifies the evidence required to support zero-rating (the sale of the converted property) and reduced-rated (conversion services) where a conversion from non-residential to residential use takes places without full statutory planning consent under the permitted development rules.

This brief is relevant to:

• Developers selling converted dwellings wishing to apply the zero rate;
• Construction industry contractors who may apply the reduced rate to the services they provided related to the conversion; and
• DIY housebuilders looking to reclaim the VAT incurred on a conversion carried out for their own purposes.

The first grant of a major interest (i.e. the freehold sale or granting of a lease over 21 years) in a dwelling following its conversion from non-residential use can be zero rated, provided certain conditions are met.  One of those conditions is that statutory planning consent must have been granted and the conversion must have been carried out in accordance with that consent.  However, as part of the process to streamline planning applications, some conversions do not require a full planning application and can be carried out under permitted development rights.

Evidence required

HMRC have clarified that they still require evidence that the conversion is lawful and would require one of the following:

• Written notification from the Local Planning Authority (LPA) advising of the grant of prior approval; or
• Written notification from the LPA advising that prior approval is not required; or
• Evidence of deemed consent (i.e. evidence that you have written to the LPA and your confirmation that you have not received a response from them within 56 days).

So the zero-rate and the reduced rate apply whether or not planning permission is granted?

No. Taxpayers will also need to provide evidence that the development is a permitted development.  If a conversion is carried out and there was a requirement for planning permission then the developer and contractor cannot rely on the permitted development rules.  This would mean that the most likely outcome would be VAT at 20% on the contractor costs which would likely be irrecoverable in the hands of the developer. VAT liability of any conversion that is not carried out in accordance with the applicable planning route would be exempt on sale.  The works to the premises in the course of the conversion would be subject to VAT at 20%.  It is therefore still important that developers and contractors ensure they are applying the rules correct to avoid a VAT cost.

The evidence that a developer or contractor should hold, includes all of the following (if available):

• Plans of the development;
• Evidence of the prior use of the property (e.g. evidenced by its classification for business rates purposes etc.); or
• Confirmation of which part of the planning legislation is relied upon for the development and a lawful development certificate where one is already held.

Whilst the use of permitted development rights is intended to streamline the planning process, HMRC’s clarification demonstrates that some interaction with the LPA will still be required in order to provide the necessary evidence of the planning status of the property in order to gain the benefit of the zero-rate and the reduced rate of VAT.

Should you have any queries on the above, or any other property related VAT matters please contact Sean McGinness or Steve McIntyre on +44(0)1962 735 350.