United Kingdom VAT & Duties Tribunals Decisions

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URL: http://www.bailii.org/uk/cases/UKVAT/2008/V20720.html
Cite as: [2009] BVC 2029, [2008] UKVAT V20720

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Whitechapel Art Gallery v Revenue & Customs [2008] UKVAT V20720 (27 June 2008)

20720

INPUT TAX – Capital goods – Partial use for non-business purpose – Charity making taxable supplies as well as providing free exhibitions – Purchase of adjoining listed building – Reconstruction of adjoining building for business and non-business use – Whether Lennartz applies to VAT on construction services – Principal VAT Directive (2006/112/EC) Art 26.1(a) (ex Sixth Dir Art 6.2) – Appeal allowed

LONDON TRIBUNAL CENTRE

Appellant

WHITECHAPEL ART GALLERY

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: THEODORE WALLACE (Chairman)

M M HOSSAIN FCA

Sitting in public in London on 2 and 3 June 2008

Andrew Hitchmough, counsel, instructed by SOC VAT Consultants Ltd, for the Appellant

Ben Collins, counsel, instructed by the Solicitor for the Respondents

© CROWN COPYRIGHT 2008

DECISION

This appeal concerns the entitlement of the Appellant to deduct input tax in accordance with the decision of the Court of Justice in Lennartz v Finanzamt M?nchen III (Case C-97\90) [1995] STC 514 on the refurbishment of the former Whitechapel Library, which adjoined the Appellant's gallery.

The Appellant is a registered charity. Its activities are outlined in the decision of the High Court in Whitechapel Art Gallery v Customs and Excise Commissioners [1986] STC 156. Its primary activity is the free display of works of art which is not a business activity. It also makes taxable supplies including sales from a shop and the hire of parts of the premises for a fee. It has elected to waive exemption of the premises and intends to make taxable supplies in the brasserie in the refurbished part.

The existing gallery in Whitechapel High Street was built in 1901. On 14 March 2006 full planning permission was given for the "conversion and alteration of the existing Whitechapel Art Gallery and Passmore Edwards Library to extend the gallery's facilities, with new gallery space, archive reading room, exhibition space and storage, education facilities and café together with supporting service infrastructure." The Listed Building Consent included the condition that,

"All existing original features shall be retained in situ except where indicated otherwise on the drawings hereby approved …"

The Library covered the entrance to Aldgate East Underground station; it was slightly older than the Gallery having been designed in 1892 with distinctive Victorian architecture. Both buildings are listed buildings situated in a conservation area.

The appeal is not against an assessment disallowing input tax or against a repayment claim but against a decision in principle in a letter dated 17 April 2008 which confirmed "that VAT incurred on the refurbishment of the Library extension to the Gallery does not qualify to be claimed up front under the Lennartz principle." Since the appeal does not concern "the amount of any input tax", within section 83(c) of the VAT Act 1994, no amount having yet been claimed, the jurisdiction of the Tribunal derives from Section 83(e), which covers the proportion of input tax allowable.

The work has not yet been completed but the brochure "The Whitechapel Project" showed the total projected expenditure including the purchase cost of the Library, which was £900,000, as £10.05 million before irrecoverable VAT.

The dispute however only covers one-third of the work. The decision letter referred to earlier correspondence. A substantial proportion of the work is accepted by Customs as qualifying for zero-rating as an approved alteration to a listed building used for a relevant charitable purpose, under Schedule 8, Group 6, Item 2 of the Act. A smaller proportion is accepted as zero-rated under Schedule 8, Group 12, Item 12 being in respect of the provision of washrooms or lavatories for disabled persons. Another part of the work relates to the brasserie in respect of which the Appellant will make standard-rated supplies and is therefore entitled to full input tax recovery regardless of Lennartz.

We were told that the proportion of the work which is zero-rated is still being negotiated by the contractor and Customs but is around 60 to 70 per cent. The Statement of Case by Customs gave a figure of approximately 80 per cent, stating at paragraph 11,

"It was therefore only the remaining 20% of the works to non-business areas, essentially repair work, to which the eligibility or not, of the Lennartz mechanism applied."

The audited financial statements to 31 March 2007 showed £1,628,669 in respect of the Whitechapel Project under "Assets in the course of construction" being Fixed Capital Assets. The auditors reported that the financial statements gave a true and fair view in accordance with Generally Accepted Accounting Practice and stated that they were properly prepared in accordance with the Charities Act 1993.

Submissions

Mr Hitchmough, for the Appellant, submitted that the Appellant is entitled to recover all the VAT incurred on the conversion work in accordance with Lennartz. He said that once the work is completed there will be deemed self-supplies on the non-business use under Schedule 4, paragraph 5(4) of the VAT Act 1994 and regulation 116A of the VAT Regulations 1995, which implement Article 26.1(a) of the Principal VAT Directive (2006/112/EC) (ex Article 6.2(a) of the Sixth Directive). In Seeling v Finanzamt Starnberg (Case C-269/00) [2003] STC 805, Charles and another v Staatssecretaris van Financiën (Case C-434/03) [2006] STC 1429 and Wollny v Finanzamt Landshut (Case C-72/05) (2006) (unreported) the Lennartz principle was applied to VAT on the construction or acquisition of buildings treated as part of the assets of a business. In Seeling and Woolny the buildings were constructed where there was no building before, however there was nothing in those cases or in Lennartz itself to limit the principle to such circumstances.

He submitted that the Lennartz principle applies to expenditure which is reflected in assets of an enduring nature used to make onward supplies as opposed to expenditure on consumables. Such expenditure is capital expenditure resulting in capital goods. In Lennartz the car was a capital good because it was used for the business. In Finanzamt München III v Mosche (Case C-193/91) [1997] STC 195 the expenditure in issue was garaging and insurance of a car, Advocate General Jacobs at paragraphs 16 to 20 distinguished between the cost of acquisition and ongoing motoring expenses; this was essentially a distinction between capital and revenue expenditure. The same approach was taken in Bakcsi v Finanzamt Fürstenfeldbruck (Case C-415/98) [2002] STC 802 at [33]. He referred also to Finanzamt Burgdorf v. Fischer (Joined cases C-322/99 and C-323/99) [2001] STC 1356.

Mr Hitchmough said that the Commission Proposal (COM (2007) 677 final) for amending the Principal Directive by adding a new Article 168a referred on page 8 to "services such as construction, renovation or substantial transformations that, in economic terms, can be placed on the same level as the acquisition or construction of immovable property." This supports an economic approach to the type of expenditure to which the Commission considers Lennartz currently applies. He submitted that this is consistent with ECJ decisions.

He said that the Whitechapel Project is far more than mere renovation and is producing an asset of enduring value : in any relevant sense the work created capital goods. He said that there are parallels with the Capital Goods Scheme.

Mr Hitchmough said that if the Tribunal decided against the Appellant on the basic submission that the expenditure produced a capital good to which Lennartz applied, the Tribunal should stay the proceedings pending the outcome of the reference by the Hoge Raad of the Netherlands in Vereniging Noordelijke Land-en Tuinbuow Organisatie v Staatssecretaris van Financiën (Case C-515/07) where a question has been referred as to whether Article 6.2 of the Sixth Directive was limited to capital goods.

Mr Collins, for Customs, said that for Lennartz to apply a new asset must be created. Here the asset is the building which Appellant had acquired before the construction work in question, so that the work did not create new goods. Lennartz concerned the acquisition of goods. In Seeling a new building was constructed where there was no building before. Here the Appellant, which already owned the Library, received services to improve it and did not thereby acquire a new asset.

He said that Article 6.2(a) concerned the non-business use of goods. The asset used for a non-business purpose is the building, which is to be treated separately from the land. In Lennartz there was a new business asset.

He said that, although significantly more exhibition space was obtained, this was because of the acquisition of the Library premises rather than its redevelopment once purchased. Expenditure which leads to a change of use without creating a new asset is not covered by Lennartz which requires the acquisition of new goods. He distinguished between services which merely improve a building and those which produce a new building. Here the building is the same, although considerably improved. To come within Article 6.2(a) there must be a new asset in the economic and structural senses: economic in value terms and structural because that is the only way to determine whether a new asset has been produced. It is not sufficient that expenditure is capital expenditure. Here the services enabled changed and better use of the property as in Bakcsi at [33].

Mr Collins said that it is difficult to place any reliance on the Commission Proposal for a new Article 168a since it does not address the question of how to decide what is renovation. The Proposal does not need to address the borderline because it takes all construction work out of Lennartz.

He said that when interpreting Articles 6.2, 11A and 17 it is not appropriate to read across from Article 20 which concerned adjustments in the case of capital goods. He referred to Nordania Finans A/S and another v. Skatteministeriet (Case C-98/07) (2008) not yet reported.

In conclusion Mr Collins said that the construction work is the improvement of the Library building and not the creation of a new building or a new asset. In order to come within the Lennartz principle the business must acquire an asset which it did not have before. The construction services did not create a new asset. There are no decided cases on work done to an existing building.

Conclusions

This is the first case involving the applicability of the Lennartz principle to construction work when a taxable person has acquired an existing building which he then reconstructs. In Charles the taxpayers purchased an existing building. Seeling and Wollny both concerned the construction of new buildings where there was no building before. In all of those cases the Lennartz principle was applied by the Court of Justice. Customs accept that if the Library had been demolished or if the works were "so fundamental that they effectively create 'new' goods (eg a new 'asset') from that which existed before" the Lennartz principle would apply; that quotation which was cited in Mr Collins' skeleton argument is taken from Customs' 2007 Information Sheet.

It was common ground that the terms of the Planning and Listed Building consents did not permit the construction of an entirely new building.

The dispute essentially was whether the Lennartz principle applies when a taxable person carries out substantial reconstruction work to an existing building but the work falls short of creating an entirely new building.

In Charles [2006] STC 1429 which concerned a bungalow purchased for holiday letting the Grand Chamber of the Court of Justice said this:

"[24] Should the taxable person choose to use capital goods used for both business and private purposes as business goods, the input tax due on the acquisition of those goods is, in principle, immediately deductible in full (see, in particular, Lennartz, para 26, Bakcsi, para 25, and Seeling, para 41).

[25] It follows from Article 6.2(a) of the Sixth Directive that when the input VAT paid on goods forming part of the assets of a business is wholly or partly deductible, their use for the private purposes of the taxable person or of his staff or for purposes other than those of his business is treated as a supply of services for consideration. That use, which is therefore a taxable transaction within the meaning of Article 17.2 of that directive is, under Article 11A 1(c) thereof, taxed on the basis of the cost of providing the services (see, to that effect, Lennartz, para 26, Bakcsi, para 30, and Seeling, para 42).

At [30] the Grand Chamber said,

"Accordingly, a taxable person has, first, the right to choose to allocate wholly to his business capital goods which he uses in part for the purposes of the business and in part for purposes other than those of his business and, where appropriate, the right to immediate deduction in full of the VAT due on the acquisition in full of the VAT due on the acquisition of those goods and, second, the corresponding obligation to pay VAT on the amount of expenditure incurred for the use of those goods for purposes other than those of the business (see, to that effect, Seeling para 43).

It was not in dispute that the converted Library will be capital goods which the Appellant will use in part for non-business purposes, in that provision of facilities free to the public in accordance with the Appellant's charitable objects is not for VAT purposes a business or economic activity. The Appellant has allocated the converted Library wholly to its business for VAT purposes. If follows that the Appellant is entitled to immediate deduction in full of the VAT due or incurred on the acquisition of the building.

Under Community Law the buildings can be a separate asset from the land, see De Jong v Staatssecretaris van Financiën (Case C-20/91) [1995] STC 727. It is clear from Seeling and Woolny that the concept of acquisition of goods in Lennartz encompasses the construction of a building and is not confined to the purchase of the building as in Charles. The references in Lennartz to acquisition clearly reflected the fact that the reference arose out of the purchase of a car and the questions referred in terms to the acquisition of goods.

The Lennartz principle arises from the application of Articles 6.2 and 17 of the Sixth Directive. Article 26.1(a) of the Principal Directive which replaced Article 6.2(a) provides,

"Each of the following transactions shall be treated as a supply of services for consideration:

(a) the use of goods forming part of the assets of a business … for purposes other than those of his business, where the VAT on such goods was wholly or partly deductible."

It is clear that the Appellant is entitled to deduct VAT on that part of the construction services which is attributable to its taxed transactions under Article 168, formerly Article 17.2, regardless of Article 26.1(a). The VAT on the building now being reconstructed is therefore partly deductible by reason of the fact that it is partly attributable to transactions which will be taxed. When the reconstructed building is used for non-business transactions, such as free exhibitions, that use will in our judgment be "the use of the goods forming part of the assets of a business" within Article 26.1(a). We can see no basis for confining such assets to the building in its condition before the construction work.

We can find no support in the case law of the Court of Justice for the proposition that the principle in Lennartz is confined to new acquisitions whether by purchase or construction of an entirely new asset or building.

It is clear that Article 26.1(a) is concerned with assets of a capital nature. At [24] and [30] in Charles when stating general principles the Grand Chamber referred to "capital goods". Acquisition can clearly occur in a variety of ways including construction and is not limited to purchase. Nor is there any concept or principle that the entirety of an asset must be acquired on one occasion or in one transaction. Construction services will frequently involve more than one contractor.

If the taxpayers in Charles had constructed a new state of the art bathroom thus enhancing the letting value of the bungalow, the result would clearly have been that the value of the bungalow as a capital asset would have been deductible just as if they had been hoteliers. From a business or economic aspect we can see no valid reason for distinguishing under Article 6.2 between the purchase of a building which has been converted and the purchase of an unconverted building which is then converted.

Although there was no detailed evidence before us as to the actual construction work, it appears to us that the reconstruction of the existing listed building in the present case may well cost more than if the existing building had been demolished and the planned building had been erected from scratch. In our judgment it would be wholly unrealistic to treat the construction work otherwise than as the acquisition of capital goods. To adapt the wording of the Proposal in COM (2007) 677 final for an additional Article 168a,

"services such as construction, renovation or substantial transformations … can be placed on the same level as the acquisition or construction of immovable property."

In our judgment the exclusion of the construction work in the present case would conflict with the principle of fiscal neutrality which is inherent in the common system of VAT.

Accordingly we conclude that the decision confirming the letter of 30 March 2007 stating, "Lennartz applies to the acquisition cost of the building but not to costs of improving or refurbishing the building" was incorrect. The appeal is allowed with costs. We direct that, unless agreed, costs be assessed by a Taxing Master of the Supreme Court by way of detailed assessment on the standard basis.

THEODORE WALLACE

CHAIRMAN

RELEASED: 27 June 2008

LON/07/833