Two recent legal decisions on VAT could be bad news for some housing associations, says Vinny McCullagh
Despite having been around in the United Kingdom for over 43 years VAT is a tax that continues to develop, through a combination of case law and legislation. The Court of Justice of the European Union (CJEU) is currently the final arbiter on the interpretation of the EU VAT Directive and it has recently issued a number of important VAT judgments which are likely to have an impact on the UK’s social housing sector. The UK Tribunals have also released a decision relating to the conversion of a property into residential units.
The CJEU recently issued a judgment relating to the recovery of input tax by a developer on costs relating to renovation works on a water pumping station owned by a local municipality.
The developer sought planning permission from the Municipality to construct a number of holiday homes. The homes needed to be connected to the pumping station but to do this, it was necessary to renovate and upgrade the pumping station.
The taxpayer (Iberdrola) agreed to undertake the renovation works and sub-contracted the actual work to a third party. Iberdrola claimed a deduction for the VAT incurred on the sub-contractor’s charges. Initially, the Advocate General of the Court issued an opinion arguing that the VAT could not be reclaimed.
However, the Court has ruled that, to the extent that the works were necessary to allow the taxpayer to undertake its taxable economic activities, the input VAT incurred on such costs could be reclaimed. This is the case even though, as here, another entity (the Municipality) also derived some benefit from the works.
After an Advocate General’s opinion that the VAT on such enabling works was irrecoverable the decision gives comfort that the entitlement in the UK to recover VAT on S106 works is correct.
Cost Sharing Groups
The VAT Directive – the body of EU law that governs the imposition of VAT throughout the Member States – provides an exemption from VAT in situations where a cost sharing group provides services to its members.
The intention of this exemption is to relieve businesses involved in making exempt supplies from incurring irrecoverable VAT on the purchase of services. In many cases, housing groups have formed shared service centres to take advantage of this cost sharing group exemption as a means of making potentially significant VAT savings.
Unfortunately however, the CJEU has recently ruled that the cost sharing group exemption is actually only available to businesses engaged in activities that are exempt from VAT pursuant to Article 132 of the Directive. A Housing Association’s main supply is the letting of property to its tenants and whilst this supply is exempt from VAT, it is only exempt pursuant to Article 135 of the VAT Directive rather than Article 132.
As a consequence, it seems that Housing Associations (like banks and insurance businesses) cannot benefit from the exemption for services provided by a cost sharing group. Any such services will be liable to VAT at the standard rate and will mean that the problem of irrecoverable VAT remains.
The CJEU’s judgment is fairly unequivocal. It has made it clear that the cost sharing group exemption is only available where the member’s activities are in the ‘public interest’, for example postal services, hospital and medical care, welfare services etc. We await HMRC’s response but those Housing Associations that have already made use of the exemption will need to look urgently at their VAT position as a result of the CJEU’s judgments.
The Upper Tribunal also recently issued a judgment in the case of Languard New Homes Ltd. The taxpayer converted a property which, prior to the conversion, was part commercial and part residential, the building in question was previously a public house. UK VAT law provides for the first grant of a major interest in a converted property to be zero-rated and, accordingly, the taxpayer in this case duly zero-rated the first sale of the finished maisonettes.
HMRC challenged the zero-rating arguing that, as the conversion incorporated both the previous commercial part and the previous residential part, the conversion did not qualify for zero-rating.
The taxpayer appealed and, initially, the First-tier Tax Tribunal agreed that the supply of the converted property qualified for zero-rating. However, HMRC appealed to the Upper Tribunal which confirmed that HMRC’s view was correct. To qualify for zero-rating, the building being sold needed to have incorporated only the previously commercial parts, so as the new maisonette incorporated both commercial and residential parts, the onward supply of the converted property could not qualify for zero-rating.
The availability of the zero rate for such projects has been an area of some doubt and all providers should take note of this binding decision of the Upper Tribunal.
Vinny McCullagh, VAT Partner, Grant Thornton UK LLP