Defeat for taxman over professional fees

HMRC have clarified their policy on ‘supply’ issues between connected parties following defeat in the High Court case involving Community Housing Association. The decision reversed an earlier tribunal verdict.

The case concerned VAT paid by the association on professional fees (architects, surveyors etc.) relevant to the building of new houses: the association had not claimed the input tax because of its intention to rent out the properties when completed, i.e. generating income that is exempt from VAT.

However, it belatedly formed an intermediary company (V) to carry out the relevant construction works, and recharged all costs incurred to date to V, in order that V could reclaim any input tax back on these costs because it was then making a zero-rated supply of ‘design and build’ construction services back to the association.

The fact that it had recharged costs to ‘V’ (taxable supply) prompted the association to make a belated input tax claim on professional fees (known as a ‘payback’ claim).

Note that this case only relates to VAT paid on professional fees because the services of builders, including materials supplied as part of their work, is zero rated in relation to the construction of new dwellings.

HMRC disallowed the input tax claim on the basis that the association was not making supplies of goods or services to V: i.e. there was no genuine business activity or genuine supplies to the new company.

Although the VAT tribunal supported this decision, the High Court overruled the verdict. The Revenue does not intend an appeal.

Independent VAT consultant Neil Warren said: ‘This case highlights the very difficult job that practitioners and taxpayers have in dealing with supply issues between connected parties when two groups of experts in different law courts come to totally opposite conclusions.

'However, the key message is that although HMRC are naturally suspicious of charges between connected parties that produce certain input tax benefits, each situation needs to be considered on its merits’.

Revenue and Customs Brief 57/09 gives a series of conditions that HMRC expect to be fulfilled for a transaction to be considered a genuine supply.

Issue: 4223 / Categories: News , VAT