Community Housing Association Ltd v HM Revenue & Customs

For VAT purposes, transactions must generally be analysed individually by reference to their objective character. An ultimate intention to make exempt supplies does not displace the relevance of an immediate taxable supply in the transaction chain.

Where a taxpayer assigns or novates contractual rights connected with partially completed development work, that assignment may constitute a taxable supply of services. Input services previously acquired may be directly and immediately linked to that taxable supply where they form cost components of it. A change of intention under Regulation 109 of the Value Added Tax Regulations 1995 may therefore arise even though the development will ultimately be used to make exempt supplies.

The appellant, a registered social landlord, incurred VAT on professional services used in developing housing intended for exempt social-housing lettings. It later transferred unfinished development projects and related contractual rights to a wholly owned subsidiary, which completed the projects and supplied them to the appellant.

The appellant claimed repayment of the input VAT under Regulation 109 of the Value Added Tax Regulations 1995, arguing that its intention had changed from using the services for exempt supplies to using them in making taxable supplies to the subsidiary. The VAT and Duties Tribunal dismissed the appeal. The central issue was whether the transfer of the projects and contractual rights was a taxable supply and whether the professional services had the necessary link with that supply.

1. The appeal was allowed. Judgment was given for the appellant for recovery of the VAT identified in its claim.
2. The descriptions used in the appellant’s correspondence and invoices did not determine the legal character of the transaction. In substance, the appellant assigned or novated the benefit of contractual arrangements with building contractors and professionals to its subsidiary. Given the wide statutory definitions, that assignment was a supply of services under section 5(2) of the Value Added Tax Act 1994. As it was not exempt, it was a taxable supply.
3. Regulation 109 required the appellant’s intention to be assessed by reference to the relevant transaction. The proper focus was the immediate supply to the subsidiary, not the ultimate provision of exempt social housing to tenants. The court applied the transaction-by-transaction approach explained in BLP Group Plc v Commissioners of Customs & Excise, [1995] STC 424, and supported by Midland Bank plc v Customs & Excise Commissioners, [2000] STC 501.
4. The professional services acquired before the transfer were directly and immediately linked to the taxable assignment. Their value increased according to the amount of work already completed, and their cost formed a component of the value of the supply to the subsidiary. The reasoning in Customs & Excise Commissioners v Southern Primary Housing Ltd, [2004] STC 209 (CA), applied.
5. Although the evidence was incomplete, both parties agreed that the court should finally determine the claim rather than remit it to the Tribunal. Judgment was therefore entered for the appellant.

1. VAT and Duties Tribunal: the appellant’s appeal was dismissed in a decision dated 10 June 2008.
2. High Court (Chancery Division): the appeal was allowed and judgment was given for the appellant.