Why make an early VAT plan for UK property? The fact is it’s never too early to think about how VAT is going to work on a property project. This is amply demonstrated by the Glasgow School of Art’s failed appeal in the Upper Tribunal ( UKUT 0173).
The School originally had three buildings, two of which were demolished and the third – the Assembly – was refurbished for letting to the Students’ Union. There was also the construction of a new building to wrap around the retained building with internal access between the two.
The big mistake seems to have been that no-one thought about VAT until it was too late. A lesson for all.
Everything was planned, designed, organised, funded and contracted as though there was one big project. However once the build was finished it seems that someone thought about VAT and asked the contractor to split the invoices between the demolition and construction elements.
As the School is partly exempt, having one inclusive demolition and construction contract meant that all of the costs would have to be treated as general business overheads. This meant that the associated VAT was only partly recoverable (and presumably at a very low percentage). Whereas if two separate demolition and construction supplies were received, the School believed it could reclaim VAT on the works that led to letting the retained Assembly building.
The argument centred on a significant weight of case precedent dictating what has to be treated as a single, indivisible supply.
It is never easy to decide what can be treated as two or more separate supplies. Unfortunately for the School the Upper Tribunal agreed with the First Tier that the School had received a single supply. In deciding that the economic and commercial reality of the construction contract was a single development of the site as whole the case was lost.
Even if the School had succeeded in its argument to split the invoices the tribunal took the view that VAT would still not have been recoverable on the retained building. This is becasue the School’s use did not amount to an economic activity. The lease to the Students’ Union was not on commercial terms and in any event formed part of the School’s necessary support of the Union. It follows that as the lease did not amount to an economic activity, had any VAT been directly attributable to the let building, none of that VAT would have been recoverable.
So this case highlights why make an early VAT plan for UK property. We always say that with VAT sooner is always better and while, in the end, this would not have secured VAT claims for the School, it would have saved them a seriously expensive argument.
Before pressing the green button on any property project please think about VAT. We can help, why not give us a call?