Zero rating for subcontractor construction supplies
Jan Garioch CA outlines the key aspects of HMRC v Summit Electrical Installations Ltd.
The Upper Tribunal have rejected an appeal from HMRC in their case against Summit Electrical Installations Ltd (Summit) [UKUT 0176(TCC)]. Summit was a subcontractor involved in the development of a block of student studio flats.
Each studio flat was fitted out with its own bathroom and kitchenette facilities. Central to the case was a planning condition on the development of the flats specifying they could only be occupied by ‘students attending Leicester or DeMontford universities or such higher/further educational establishments as the local authority may subsequently agree’.
Initially, Summit zero rated its invoices but, following a check, HMRC denied zero rating of Summit’s supplies. They contended that Summit should standard rate its supplies to the main contractor who would be entitled to recover on the basis of its zero-rated supply.
The contractor refused to accept VAT only invoices from Summit on the grounds that VAT was not properly chargeable and would, in any event, create significant cash flow problems. Summit was left with little alternative but to get a judicial determination on the nature of their supply.
The First Tier Tribunal held that Summit made a zero-rated supply and HMRC appealed to the Upper Tribunal. The legal focus fell on Note (2) (c) to Group 5 of Schedule 8 VATA 1994. That provision grants zero rating to supplies in the course of construction of a dwelling where ‘the separate use, or disposal of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar’.
After examination of relevant case law, the Upper Tribunal concluded that zero rating is not denied unless the effect of the relevant covenant, or planning condition is to prohibit the use of the premises separately from any other specific land. It was not enough that the use of the premises was linked to an activity or business. It was crucial that the link was to specific land or premises.
The [Upper Tribunal] pointed out that his submission was unpromising from the start since the planning condition contained no reference to particular university campuses.
Counsel for HMRC accepted it was crucial to answer the question of whether the planning condition was intended as a restriction on the use of the studios' flats by reference to the business of the universities (which would allow zero rating) or by reference to the buildings of the universities (which would deny zero rating).
He then attempted to argue that the planning restriction, in this case, was by reference to the buildings, but the Upper Tribunal had little difficulty in dismissing his argument. They pointed out that his submission was unpromising from the start since the planning condition contained no reference to particular university campuses or sites.
They felt the merit of his argument was further weakened by the fact that a student enrolled by either Leicester or DeMontford universities could attend part or all of their course in buildings not owned by one of those universities, yet if a flat were let to that student it would not breach the planning condition. Consequently, HMRC’s appeal was dismissed.
[The case] will also interest higher/further education institutions which are experiencing difficulty in securing sufficient accommodation for their students.
This ruling is important to the provision of student accommodation. It relieves main contractors from a major cash flow burden which may make more projects viable.
It will also interest higher/further education institutions which are experiencing difficulty in securing sufficient accommodation for their students, particularly in crowded cities where they face competition from other institutions. They can explore the use of planning restrictions like the one in this case without an adverse VAT consequence.