Summer Newsletter

Welcome to our Summer news update. Since the last one we don’t seem to have much more clarity on what the post-Brexit business landscape will look like, but we have seen the publication of the European Union (Withdrawal) Bill, which is the most significant piece of constitutional legislation for decades.

We’ve also seen some important cases on property development in relation to pub conversions and student accommodation, and VAT has now become the focus of the upcoming changes to the government’s Making Tax Digital programme.

As always if you have any questions on VAT give us a call on 0208 492 1901 or drop Soc or Linda an email.

Pub and shop conversions

We report on the VAT pitfalls that can occur in converting commercial buildings into residential as illustrated by two recent cases. Get in touch if you are not clear on the rules. Read more

When is student accommodation a dwelling for VAT?

A recent case has highlighted some important VAT differences that contractors and sub-contractors need to be aware of when working on student accommodation. Read more

UK VAT Brexit and EU law- an example

The European Union (Withdrawal) Bill in clause 4(1) aims to convert EU law applicable in the UK the day before the UK leaves the EU into domestic law. This will then be “frozen” and any question as to the meaning of EU-derived law will be determined in the UK Supreme Court by reference to the Court of Justice of the EU (CJEU) case law as it exists on the day we leave the EU.

This is not such a change for us VAT practitioners, because the legislative structure of the UK VAT Act and domestic VAT Regulations are, in principle anyway, meant to reflect EU principles. One of these is that UK VAT laws are as far as possible, meant to be construed in accordance with the Principal VAT Directive (PVD) and the case-law of the Court of Justice of the EU. Where UK law deviates from EU law that principle can be an important benefit for UK taxpayers, who can argue against HMRC for the ‘direct effect’ of the EU provisions, as can be seen from the case of The Learning Centre (Romford) Ltd  in which the tribunal has ruled that HMRC were wrong to force the company to charge VAT on welfare services.

The Bill however provides that the principle of ‘direct effect’ is abolished as from exit day.  From exit day, therefore, it will no longer be possible to base a tax claim on the PVD itself, and the case above, if heard after then, might therefore have had a different outcome.

Making Tax Digital

The Government announced major changes to the timeline for the implementation of Making Tax Digital (MTD). Under the new timetable only businesses with a turnover above the VAT threshold (currently £85,000) will have to keep digital records and only for VAT purposes, though they can volunteer to do so for other taxes. There is still a lot of detail to flesh out. Read more

The VAT problem with pubs

Two recent cases, Languard New Homes Ltd and MacPherson illustrate the continuing VAT issues with non-residential conversions, particularly problems with conversion of pubs and shops.

Normally if a developer carries out work on an existing flat or house and sells a long lease in it afterwards, he will incur VAT of 20% on the works and the sale of the lease will be exempt. The exemption means that the developer can’t claim the VAT on the works and related costs.  This additional VAT cost increases the cost of residential conversions, particularly in comparison with new builds where the construction services and sales are normally zero-rated.

However, the sale of a newly converted non-residential property which creates additional dwellings can be zero rated, which is important, because it means that the developer can claim VAT on contractors’ fees and related costs.

The problem lies with the legislation on conversions, which states that this only applies to conversion of non-residential buildings or non-residential parts of buildings. If there is any part of the building which was residential before, the conversion of a non-residential part does not allow you to zero rate the sale of the final dwelling unless the result of that conversion was to create an additional dwelling or dwellings.

This causes a big headache for pub and shop conversations, where often there was some associated residential accommodation for the landlord or staff. Often this accommodation is on upper storeys with the commercial below, but on conversion the building may be divided into new residential units vertically, not horizontally, meaning that the new dwellings all incorporate a part that used to be commercial and a part that was always residential.

This is what happened in the cases of Languard and MacPherson. The Upper Tribunal has decided that none of the dwellings in either case had been created by converting part of a building that had not been previously designed for use as a dwelling, because they had been created from an amalgamation of the non-residential parts and the residential parts. Consequently, nether company has succeeded so far in obtaining zero -rating and thus recovery of input tax.

Why it matters:These are disappointing decisions because the point of this legislation was to encourage the redevelopment of existing commercial properties into dwellings, to address housing shortages and use “brownfield” sites. It is hoped that the Office of Tax Simplification will look at this as part of its current review of VAT,  as the complexity of the rules and HMRC’s enforcment of them appears to be thwarting that policy intention.

Developers and builders need to understand the rules about conversions to maximise VAT recovery and avoid errors. If you would like to discuss this case or similar developments give us a call.

UK VAT exemption for welfare services incompatible with EU law?

The First Tier Tribunal (FTT) has suggested, not for the first time, that the UK exemption for welfare services is in breach of EU law, so taxpayers supplying services may be entitled to invoke exemption under the principle of direct effect

Learning Centre (Romford) Ltd (TLC) provided education, activities, and entertainment to vulnerable adults with learning difficulties during working hours, Monday to Friday. TLC provided the students attending the centre with meals, including assistance with eating where required, administered medication, and personal care.  HMRC accepted that TLC provided ‘welfare services’ but did not agree that TLC met the conditions to exempt those services from VAT. Under UK legislation welfare services are exempt only when supplied by charities public bodies and “state regulated private welfare institutions or agencies”. HMRC did not accept that TLC was state regulated.

The Tribunal agreed that TLC was not state regulated as defined by the legislation, but went on to rule that the UK has unlawfully exercised the discretion conferred on it by the EU VAT Directive in choosing the regulation of welfare facilities as the criterion by which suppliers devoted to social wellbeing are ‘recognised’ for exemption, because the law on regulation could lead to discrimination in VAT treatment between identical services. It ruled that as the UK’s implementation of the welfare services exemption was unlawful, the company was entitled to rely on the direct effect of the VAT Directive and as a body devoted to social wellbeing its supplies were, and always have been, exempt.

Why it matters: This decision could be very significant for other providers of welfare services, but it seems likely that HMRC will seek to appeal, having done so in an earlier case where the FTT came to a similar conclusion for different reasons. It remains to be seen whether this kind of distortion will be left in UK VAT legislation when we exit the EU.