United Kingdom VAT & Duties Tribunals Decisions
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URL: http://www.bailii.org/uk/cases/UKVAT/2008/V20797.html
Cite as: [2008] STI 2511, [2008] UKVAT V20797, [2009] BVC 2139
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- Graham Anthony Farley (Mr Farley) and Philip Robert Cox (Mr Cox) were at the material time in a trading partnership known as West London Self Storage Centre. They carried on a self-storage business from freehold premises in Freston Road, London W10. The trading particulars had been registered for Value Added Tax (VAT) since January 1995 when they opted to tax the building containing storage units making the relevant election pursuant to Schedule 10, paragraph 2 of the Value Added Tax Act 1994.
- As West London Self Storage Centre had opted to tax the premises at Freston Road when they purchased, they became entitled to VAT paid on the purchase price and had to charge VAT on rentals to their customers. Those customers who were registered for VAT could then deduct the VAT as a cost component of their businesses.
- In 2004 West London Self Storage Centre decided to sell their storage unit business to Shurgard Storage Centres UK Limited who with other group companies operated similar businesses in the United States as well as the United Kingdom . Shurgard Storage Centres UK Limited did not want to opt to tax the land since it would then be required to charge VAT to its customers which was contrary to its operating policy. At the same time, it did not wish to incur irrecoverable input VAT on the purchase of the freehold of the Freston Road premises. This amounted to £875,000 and an assessment was issued for this sum. Accordingly, both Appellants sought to prove that the option to tax exercised by West London Self Storage Centre was disapplied.
- In this decision the following apply :
- The relevant law is set out in the Annexe 1 hereto and paragraphs 46-54 inclusive.
- These schemes sought to fulfil the criteria for the application of anti-avoidance provisions contained in paragraphs 2(3AA) and 3(A) of Schedule 10 of VATA and which disapplies the option to tax. This case involved arranging the financing of the Property by Shurgard, and the carrying out of certain expenditure by building works designed to turn the Property into a capital goods item within the Capital Goods Scheme.
- Involved in this appeal was a series of transactions entered into by the parties under which building works were agreed to be carried out upon the Property for which Shurgard funded West London including related expenses. The works were carried out entirely at the expense of Shurgard by Paradigm
- The building works in fact began one month after the date on which Shurgard were given rights to occupy the Land, bought Other Assets, and took over the running of the business.
- The issue in this appeal is whether or not the transactions entered into between the two Appellants, Shurgard and West London had the effect of "washing out" an option to tax exercised previously by the vendors, such that the purchasers could make non-taxable supplies of rights to occupy hitherto taxable and, at the same time, obtain the Property free of tax.
- Mr Prosser called one witness, Mr Anthony Edward Leyland (Mr Leyland) who had been the Managing Director of Shurgard at the material times. He also submitted three other agreed witness statements. There was an agreed bundle of just under 800 pages of documents.
- There was no real dispute as to the facts which we find as follows.
- In January 1995 Mr Farley and Mr Cox trading as a partnership under the name of West London applied to be registered for VAT indicating that they were purchasing the Property at Freston Road. They indicated to HMRC that they would opt to tax the Property making the relevant election under Schedule 10, paragraph 2 of VATA. As a result of this election, input tax amounting to approximately £131,250 was recovered on the purchase of the Property. It was a large property some 47,000 square feet in size and the purchase price was £750,000
- The ten adjustment interval under the Capital Goods Scheme for the two partners in respect of their original purchase and fitting out of the building into some 600 individual storage units had expired before the transactions with Shurgard took place. Since an election to waive the exemption had been exercised on the Freston Road Property in ordinary circumstances VAT would normally be charged upon its sale.
- At the end of 2003, Mr Farley and Mr Cox decided to endeavour to sell their entire business carried on at Freston Road as it had increased considerably in value. They had obtained an outline local authority planning consent. The Property therefore also had redevelopment potential. Interest was shown by potential purchasers and there was in April 2004 an offer on the table from Acton Housing Association at £7.44 million but conditional on planning for social housing being obtained.
- It so happened that Shurgard was, at the start of 2004, seeking to expand its operations and in March became aware that the Freston Road business was available. After inspection, Shurgard decided to negotiate for the purchase of the enterprise. Calculations were carried out by Shurgard in order to ascertain how much Shurgard would be willing to pay for the business including the Property. A total figure of £7.25 million was reached. Shurgard also intended, if successful in purchasing the business, possibly to increase its capacity and develop the site.
- As no planning consent had to be obtained the offer from Shurgard was in principle accepted by Mr Farley and Mr Cox but Shurgard wanted their accountants Deloitte to advise on the VAT implications in order to achieve their desire not to pay VAT on any part of the proposed transaction; also they wished to procure that West London's option to tax was disapplied.
- Deloitte provided a detailed explanation of the VAT issues and "possible solution" in connection with the proposed transaction in a letter to Shurgard dated 26 April 2004. This letter which contained the mechanism of the avoidance scheme the subject of this appeal is at Annexe 2.
- In the light of this advice from Deloitte, the partners therefore agreed with Shurgard to enter into the arrangements in question in order to ensure that West London's option was disapplied. All the legal costs and VAT liabilities were to be met by Shurgard. Shurgard was concerned to avoid incurring VAT on the acquisition of the business, and that there should not be any break in the running of the business, or any disruption to the operation of the self stage facility that might lead to a loss of business.
- Shurgard maintained that the property did not comply with Section 20 of the London Building Act 1939 which lays down the mandatory fire protection requirements in buildings exceeding 7,100 cubic metres. In a letter from Mr Cox to HMRC of 31 January 2005 he stated that, "my partner and I did not share Shurgard's view". This is confirmed by a note of a meeting at Freston Road on 23 April 2004 where Shurgard raised the issue of Section 20 which states that "Graham Forley countered with there being no issues with the Fire Officer and the fact that the building predates the 1939 Act."
- Mr Cox's letter of 31 January 2005 goes on to explain that "other potential purchasers of the property were available and the additional fire separation and health and safety works required by Shurgard would not have made the building any more attractive to these other purchasers. As a result, although we were prepared to meet Shurgard's demands we were not prepared to accept the financial risk of meeting the cost of the refurbishment."
- The partners were concerned with the effect of the building works on business. Mr Cox stated in his letter of 31 January 2005 "We were not prepared to suffer the potential loss of revenue that could have arisen as a result of the disturbance to the building. In addition, we were not prepared to deal with the potential complaints that customers would raise as a result of the refurbishment. We therefore agreed to phase the transaction so as to dispose of the business whilst we undertook to refurbish the site to meet Shurgard's needs."
- It was therefore agreed that Shurgard would pay for the works and any related expenses. As stated in Final Heads of Terms, dated 14 May 2004, "The purchaser[s] to enter into a funding agreement with the seller to provide funds to the seller to enable the works that will result in compliance with current regulations . The purchaser shall provide the initial draft letter for the seller to send to Customs & Excise but, thereafter, the purchaser shall reimburse the seller's reasonable legal and accountancy fees incurred in discussions with Customs & Excise The seller to keep the purchaser fully informed as to the progress of such discussions and involve the purchasers' advisers, Deloitte, in any discussions with the Customs & Excise at the purchasers cost".
- In accordance with the Final Heads of Terms, Mr Farley on behalf of West London then wrote to HMRC, using a draft letter provided by Shurgard, on 14 May 2004 in order to "request clarification of VAT treatment concerning the proposed future sale " the letter described the proposed transactions to HMRC. The relevant part of the letter reads as follows :
- In a letter of reply dated 1 June 2004 HMRC indicted that if Shurgard did not opt to tax the Property the sale of the business could not be treated as a TOGC. They pointed out that one of the conditions for the sale of a property-rental business to be treated as such was the purchaser opting to tax the property. They indicated that the sale to Shurgard would have to be treated as a taxable supply if Shurgard did not opt to tax.
- Mr Farley sought again to explain how the tax avoidance scheme worked in a letter to HMRC dated 9 June 2004. He commented
- HMRC responded in a letter of 25 June 2004 indicating that their policy was not to give rulings where it suspected that transactions were part of a tax avoidance scheme. Officer Adrian Sellers stated. . "I will not be able to provide you with a ruling as the contents of your. letter are clearly tax planning relating to "Option Cleansing" which is a. known tax avoidance scheme."
- As HMRC refused to give a ruling, On 2 July 2004 Shurgard consulted Kenneth Parker QC in conference concerning the chances of success for the proposed transactions. He advised that it appeared all the proposed structural documentation accurately reflected the proposed transactions and provided that the transfer of the freehold did not take place until after the completion of the refurbishment works, was confident that there was a 90% chance of success. In the event that the transfer of the freehold took place around four weeks after the transfer of the business, but before the completion of the works, the chances of success were still good, but were slightly reduced.
- On the basis of this advice. The parties decided to proceed under the Final Heads of Terms which had been subject to contract.
- Meetings took place with representatives from the contractors (JTC), Shurgard and Paradigm which acted as the lead consultant. Neither Mr Farley nor Mr Cox attended because they were not to be involved in the way in which the building works were carried out. Indeed, it was finally agreed that Shurgard would pay for all of the works and Paradigm's fees and supervise totally these works. West London were never concerned at all.
- The greater part of the works was specifically fire-safety/health and safety related such as installing fire-walls and fire shutters and improving the fire-escape routes. There were some other jobs, such as installing disabled toilet facilities and converting an area on the first floor of the property from offices into self-storage units as Shurgard intended to administer the business from elsewhere. Initially the cost of these works was estimated at £350,000 plus VAT. Shurgard did not want to pay such a large sum, so the extent of the works was cut down and a figure of £270,000 plus VAT was agreed with JTC. Paradigm's fees amounted to £30,000 plus VAT. Shurgard paid both these sums and the resultant VAT without recourse to West London.
- Following the Final Heads of Terms entered into on 14 May 2004, further discussion concerning the details of the transaction took place between the parties and their advisers.
- Eventually, at the end of August 2004, following these negotiations, a number of agreements were entered into including :
- The effect of these agreements was that before the building works were carried out by JTC Shurgard was in occupation of the property under a licence granted to them by West London on 1 September 2004 at the same time as the other Assets were sold. From this point onwards, West London were not running the self-storage business in any way. Shurgard had a charge on the Property and a licence to occupy. It had acquired the self-storage business including customer details. This was before works commenced. No consideration was paid for the licence to occupy.
- The building works commenced on 4 October 2004. On that day it was necessary for JTC to dismantle the individual storage unit containing a vintage car. JTC sought a written indemnity to cover possible accidental damage to the vehicle, and this was provided by Shurgard's store manager.
- From 1 September 2004 Shurgard maintained the existing process for rentals but the income was treated as an exempt supply and therefore all such sums received went direct to Shurgard and no output VAT was accounted for to HMRC.
- On 30 November 2004 Mr Farley wrote to the National Advice Service of HMRC notifying that the negotiations with Shurgard had proved successful and an agreement had been entered into for the transfer of the business on 1 September 2004. A summary of the VAT position as viewed by West London was set out and a request made for HMRC to confirm all was in order.
- HMRC replied extensively on 15 December 2005 notifying Mr Cox that after having meetings with representatives from Paradigm, JTC and Shurgard and giving "careful consideration to all the facts of the case" a conclusion was formed that VAT " was due on the disposal of the self-storage business". Further decisions were indicated. First, it was the view at that time of HMRC that a single supply of the self-storage business including the property took place on 1 September 2004. This was not eligible to be treated as the transfer of the business as a going concern because Shurgard had not opted to tax the property. Consequently, the amount of VAT due on that date was £1,268,750 and an assessment was issued for this sum.
- On 12 January 2005 West London requested HMRC to reconsider the decisions given by Officer Richard Brown in his letter of 15 December 2005.
- HMRC Team Manager John Ayling replied by letter dated 17 January 2006 stating his team could not be involved at that stage. The reason given was that it was a complex case and Mr Ayling said that HMRC needed to know for example, which principle or point of law was thought the Officer may have mis-interpreted. As West London was still taking professional advice and their position was not clear, the reconsideration request could not be dealt with at that stage.
- HMRC subsequently held meetings with interested parties such as JTC, Paradigm and Shurgard and also entered into further correspondence.
- As matters were not taken any further with reference to the alternative assessments and the misdeclaration penalty which was subsequently issued, West London appealed on 30 January 2006 and Shurgard followed on 1 February 2006 as it had "a clear financial and legal interest in the matter in dispute." The two appeals were later consolidated.
- The Respondents served their Statement of Case and List of Documents dated 7 August 2006 on the Appellants. The Statement dealt with the Appeals against the Assessment, alternative Assessment and the misdeclaration penalty referred to in paragraph 38 above.
- Subsequently, HMRC decided as a matter of policy (1) not to proceed with the two Assessments in respect of the disposal of the Freston Road Business (2) to withdraw the misdeclaration penalty and (3) not to rely upon "any further arguments based upon the Community Law principle of "Abuse of Law" as explained in Case C-25502
- This was only communicated to the Appellants and the tribunal: by delivery of an Amended Statement of Case dated 28 March 2008 incorporating these factors: and shortly afterwards by the Respondents' skeleton argument dated 7 April 2008 in readiness for the hearing: also, a fresh assessment for VAT amounting to £875,000 plus interest in respect of the sale of the property was issued by HMRC on 8 April 2008.
- The basic rules in VAT is that any supply of goods or services by a taxable person for consideration is taxable unless exempt. Section 4 of the VATA provides :
- Supplies of land are generally exempt under VATA Schedule 9 Group 1 Item 1 unless an election to waive exemption is made under Schedule 10 para 2 (reflecting Articles 13B(b) and 13C of the Sixth Directive, now articles 135 and 137 of the recast Directive 2006/112/EC.
- Although the law is set out more extensively in Annexe 1 hereto, we explain in this section how the relevant two parts of the VAT legislation apply and interact in this appeal.
- It is common ground agreed by this tribunal that West London had made an effective election under Schedule 10 paragraph 2 in 1995.
- However, in certain circumstances, an election to waive exemption in relation to a piece of land will be disapplied (in relation to any supplies of that property by the person who made that election) by paragraph 2 (3AA) of Schedule 10 of VATA which was introduced by the Finance Act 1997 evidently to counteract certain avoidance schemes. Paragraph 2(3AA) provides as follows :
- Whether a grant has been made by a "developer" of land is determined as follows :
- The Capital Goods Scheme applies only to an asset which falls within the definition of "capital item". In the first year of such an asset's use the taxable owner will be able to reclaim all, none, or a proportion of the input tax incurred on the asset's acquisition, depending upon whether it is using the asset to make taxable, exempt or partially exempt supplies. Under the Scheme, subsequent adjustments can be made during a "period of adjustment" if there is a change in the use of the asset.
- The Regulations made under section 26(3) and (4) of VATA are the VAT Regulations 1995(SI 1995/2518). Regulations 112 and 113 determine whether an asset such as the Property in this appeal is a capital asset for the purposes of the Capital Goods Scheme or not. The definition of what is a "capital item" is described in Regulation 112 as :
- Section 94 of the VATA defines the meaning of the word "business" and provides in sub-section (5) that "anything done in connection with the termination or intended termination of a business is treated as being done in the course or furtherance of that business."
- For the Appellants Mr Prosser submitted that the sale of the Property to Shurgard was not a taxable supply by virtue of West London's prior election to waive exemption because that election was disapplied under paragraph 2 (3AA) of Schedule 10 of the VATA (paragraph 2 (3AA)).
- He contended that in accordance with paragraph 2(3AA)(a) West London was a developer in relation to the Property as defined by paragraph 3A(2) because either
- Dealing first with the objective test, the Appellants maintained that all of the necessary conditions for the Property to fall to be treated as a capital item were satisfied within regulations 112(2) and 113(h) of the VAT Regulations 1995. Mr Prosser said that the refurbishment or fitting out works were carried out on the Property and these works were carried out by West London. The value of expenditure on taxable supplies of services and of goods affixed to the Property made or to be made to West London for or in connection with the works was not less than £250,000.
- It was argued that the expenditure was "capital" expenditure. Mr Prosser said that the Property was a capital asset of West London and the expenditure was on improving that asset and therefore was itself capital rather than current expenditure ; he gave as an example the decision of the House of Lords in Tucker. He also referred to Article 20.2. of the Sixth VAT Directive and the decision of the ECJ in Verbond to the effect that "capital goods" are distinguishable by their durable nature and value and such that the costs are not normally treated as current expenditure but are written off over several years.
- Mr Prosser stated that the Appellants' case was that West London used the Property in the course or furtherance of its business and otherwise than solely for the purpose of selling the Property. In this connection, the contract for the works was entered into and the costs were invoiced on 31 August 2004 immediately before the self-storage business was sold. It was submitted that "use" for this purpose included use in the course of refurbishment or fitting out. Mr Prosser referred to the tribunal decision in East Kent and particularly paragraph 12.
- The Appellants inferred that as from 1 December 2004 West London licenced the refurbished Property to Shurgard in compliance with its obligations to Shurgard pursuant to the sale of the business and this licence was part and parcel of the commercial transaction of selling the property and the self-storage business. It was asserted that this was a form of "use" by West London of the refurbished Property and in furtherance of and for the purpose of the business because it was done as part and parcel of the disposition of the business as a going concern complying with section 94(6) of VATA.
- Indeed, said Mr Prosser, the expression "business" in Regulation 112 must be taken to refer to the whole of the economic activity carries on by West London, not just making supplies to self-storage customers, but also the sale of the Property (which was a taxable supply) and the sale of the self-storage business (which was also a taxable supply subject to the TOGC provisions). He referred to Article 4 of the Sixth Council Directive of 17 May 1977 (77/388/EEC), and the decision of the ECJ in Abbey National at paragraph 35 and in I/S Fini at paragraph 23 to the effect that the termination of the business (like acts preparatory to its commencement) must be regarded as part of the economic activity of the business as a whole. By licencing the refurbished Property to Shurgard, West London used it in the furtherance and for the purpose of its economic activity including the sale of the Property and of the self-storage business. He gave as an example Drexlodge where an indemnity from A to B for the costs of works carried out by B did not precede B having incurred the expenditure so that it could recover the input tax (in the absence of an agency agreement). Mr Prosser pointed out that there was never any suggestion that West London engaged the contractors as agents for Shurgard.
- West London and Shurgard intended or expected that the Property would become an asset falling in relation to West London to be treated as a capital item for the purposes of the Capital Goods Scheme Regulations.
- Mr Prosser said it was clear that both West London and Shurgard intended or expected that the refurbished Property would become an asset falling in relation to West London to be treated as a capital item under Regulation 113(h).
- Paragraph 3A(2)(b) was inserted in 1999 by Article 5 of the VAT (Buildings and Land) Order 1999. The Note to the order explained that by Article 5 "Land is now within the scope of paragraph 2 (3AA) if it is a capital item within the capital goods scheme or if the grantor or the person financing the grantor intends that it will become one". Mr Prosser maintained that this supported the Appellants' interpretation that the relevant intention or expectation was that the land would fall to be treated as a capital item. In the present case, it was argued that there was a genuine intention or expectation because West London and Shurgard received advice from highly reputable advisers that the Property would fall to be treated as a capital item..66. Regarding Shurgard's intention and expectation, it was submitted that these are relevant to the subjective test within paragraph 3A(2)(b) because Shurgard was a person responsible for financing the development of West London's development of the Property for exempt use, defined by paragraph 3A(3) to include a person who :
- By paragraph 3A(7) Mr Prosser stated that land is "exempt land" if at a time falling within the Capital Goods Scheme period, the grantor, or a person responsible for financing the grantor's development of the land for exempt use, is in occupation of the land without being in occupation of it wholly or mainly for the purposes of making taxable supplies.
- Bearing this in mind, as well as West London, Shurgard intended or expected that the Property would become "exempt land".
- Miss Foster for the Respondents submitted that their case was that the expenditure failed to create a capital item under the tests in Regulations 113(h) and 112(2). This was mainly because the costs of refurbishment were not properly described as capital expenditure. Such costs were not seen to be capital costs of running a storage business as they were incurred after the time when West London's storage business had ceased.
- In addition, she argued that the expenditure was with a view to sale of either the Property alone or jointly with the other assets constituting the storage business. Also, the works carried out on the Property were not cost components of any supplies made in the course or furtherance of the business carried on by West London.
- Customs contended that to be a cost component of a particular supply, the costs must be incurred "in the normal causal chain of supply" for that supply, and must be incurred in close temporal proximity to the supply in question. In her skeleton argument, Miss Foster relied upon the decision of the ECJ in Midland Bank at paragraphs 29 to 31 inclusive in this connection.
- She referred to HMRC's Notice 706/2 which explains how the Capital Goods Scheme works and what items are covered by the Scheme. Miss Foster particularly drew the tribunal's attention to paragraphs 1.2, 1.4, 3.1, 3.3, 4.9 and 4.10.[these paragraphs are set out in Annexe 3 hereto]
- In reply to the Appellants' argument that the requirement of use in Regulation 112(2) was satisfied by the "assumption" and "performance" actions of West London, Miss Foster contended that it was a misunderstanding of the notion of use in this context. In her view, use of costs in VAT is an economic concept. Use means "use as a cost component of supplies made" and she relied upon the decisions in Abbey National and Midland Bank for this assertion. She said that the concept of use imports the notion of making of taxable supplies for VAT purposes, i.e. in a business. She quoted from paragraph 32 in BUPA Purchasing and Gracechurch Management Services in support, Miss Foster added that nothing done by West London constituted use in this sense. The taxable supplies which comprised West London's business were taxable supplies of self-storage in the opted Freston Road Business. There was no taxable supply made by West London of "the service of assuming responsibility to Shurgard to carry out works" or of "fulfilling an obligation to carry out works".
- Miss Foster referred to another argument of the Appellants that it was possible to construe the use in Regulation 112(2) as "use in the course or furtherance of West London's business" within the regulation, even though it related merely to the disposal of the Freston Road Business. She argued that the costs involved in the refurbishment were linked entirely to the Property supply. Costs which are incurred for the disposal of a business are in the nature of a general overhead of that business. A cost cannot be a general overhead when it is directly and immediately linked to a particular supply as occurred in the sale of the property. She quoted again from Abbey National and also Mayflower Theatre Trust to give weight to her argument.
- Reference was made by Miss Foster to the European case of Verbond when the Court was considering what was the correct interpretation of the expression "capital goods". In paragraph 8 the Court said in answer to a question arising as follows :
- In support of her argument in the previous paragraph, Miss Foster referred the tribunal to the judgment of Mr Justice Park in BUPA Purchasing when he stated in paragraph 32 :
- In conclusion, Miss Foster submitted that the Appellants' analysis of the transaction was incorrect. This analysis commenced under paragraph 2 (3AA) of Schedule 10. The result was that the expenditure incurred on refurbishment did not have the character of a capital expenditure and could not create a capital item under the Regulations.
- We have already set out in paragraphs 6 9 inclusive of this decision a brief summary of the circumstances leading to the appeal. In determining the issue, we have considered carefully all the evidence and the arguments of the parties which constituted virtually all the proceedings except for one witness, Mr Leyland. He appeared briefly before the tribunal and the facts in his lengthy written statement were accepted by both parties, indeed Miss Foster did not even cross examine him in any respect.
- The main questions to be determined by the tribunal are " was the sale of the Property to Shurgard a taxable supply by virtue of West London's prior election to waive exemption" or "was that election disapplied by paragraph 2(3AA) of Schedule10 of VATA" ?
- The tribunal accepts the submission of Mr Prosser that there are two tests to determine whether the Property was a capital item. These are the objective test in paragraph 3A(2)(a) and the subjective test in paragraph 3A(2)(b). These tests are subject to the definition of capital item contained in Regulations 112 and 113 of the VAT Regulations 1995.
- Because of the importance of the Appellants having to prove to the tribunal on the balance of probabilities that regulations 112 and 113 are satisfied we will consider the provisions of these regulations first.
- The effect of the definitions in regulations 112 and 113 is that a building such as the Property is a capital item if (a) the building is used in the course or furtherance of the owner's business otherwise than solely for the purpose of selling the building and (b) the owner incurs not less than £250,000 capital expenditure on taxable supplies in refurbishing the building.
- It was accepted by the parties that West London at the instigation of Shurgard who provided all the finance incurred which was more than £250,000 (including Paradigm's fees) on taxable supplies in refurbishing the Property. West London never had to pay the sums expended and the works were carried out under the supervision of and at the insistence of Shurgard in the sale of the Property. The works which were mainly concerned with fire precautionary measures were not obligatory by statutory regulation but would be advantageous in the event of future re-development when they would become compulsory.
- These construction works were, in our view, linked entirely to the transfer of the Property which took place on 9 December 2004 and were solely for the purpose of selling the Property. There is corroborating evidence as set out below :.* advice from Deloitte to Shurgard dated 26 April 2004 which stated " The. funding agreement should state that the purchase of the property was . conditional on certain works being carried out and that Shurgard would. fund the costs involved "
- We now consider the implications of regulation 112(a). Mr Prosser maintained that the expression "business" in this regulation referred to the whole of the economic activity carried on by West London not just making supplies to self-storage customers but also the sale of the property (which he said was a taxable supply subject to the TOGC provisions). He referred to the decisions of the ECJ in Abbey National and I/S Fini to the effect that the termination of a business must be regarded as part of the economic activity of the business as a whole.
- Mr Prosser also argued that West London's use of the refurbished Property (by licensing it to Shurgard) was for the purpose of selling the Property and the self-storage business. Miss Foster submitted that it was solely for the purpose of selling the Property.
- In order to answer this fundamental point at issue between the parties, it is necessary to consider what was in the minds of the partners of West London in this respect. The tribunal was supplied with copies of the Partnership Tax Return of the West London particularly for the year ended 5 April 2005 which is dated 21 October 2005, and Mr Farley's tax return for the same period. The Partnership Tax Return states that the date of the cessation of business was 1 September 2004. There is no reference to a continuing licensing business. Similarly, in relation to Mr Farleys' tax return he also sates in Box 4.6 that he ceased being a partner on 1 September 2004.
- Also, the Partnership Tax Return indicates in the section entitled "Partnership disposal of chargeable assets" that there were two disposals namely "Sale of goodwill of West London Self Storage = £2,249,996" and "Sale of Property of West London Self Storage = £5 million".
- In the letter from West London to Mr R Brown of HMRC dated 31 January 2005 (referred to in paragraph 85 above) the partners say in paragraph 5 as follows :
- In the light of this evidence, we take the view that the partners of West London never intended there to be a continuing economic activity of their business beyond 1 September 2004. As far as they were concerned, they had disposed of their entire business and the only reason why Shurgard delayed the purchase of the property was to refurbish it to the standard they considered desirable and more importantly to wash out an option to tax exercised previously by West London. There is no factual evidence (other than the licence) that after 1 September 2004 West London's "business" (i.e. some economic activity) continued right up until completion of the sale of the property. If this was the case, their final tax return should have stated so.
- With reference to the alternative subjective test in paragraph 3A(2)(b) Mr Prosser submitted that West London and Shurgard intended or expected that the Property would become an asset falling in relation to West London to be treated as a capital item for the purposes of the capital good scheme regulations. This intention or expectation arose because of advice from PWC and Kenneth Parker QC.
- Applying paragraph 3A(7) Mr Prosser argued as mentioned in paragraph 67 above that land is "exempt land" if at a time falling within the Capital Goods scheme period, the grantor, or a person responsible for financing the grantor's development of the land for exempt use, is in occupation of the land without being in occupation of it wholly or mainly for the purpose of making taxable supplies. We have found as a fact that the evidence in this case shows that Shurgard was wholly in occupation of the Property for the purpose of making taxable supplies from 1 September 2004 as it had been granted a licence by West London. Therefore, the Property could not be "exempt land" nor intended or expected so to be.
- The Appellants' case was still that even if West London's carrying out of the works did not create a capital item West London was still a "developer" of the Property by virtue of paragraph 3A(2)(b) on the basis that both West London and Shurgard as the financier "intended or expected" at the time of the relevant grant that West London's carrying out of the work would have created a capital item in West London's hands (i.e. by the time of the Property transfer) Mr Prosser argued that the words "intended or expected" indicted that one must look at all genuine, subjective intentions and expectations, and not only those which are based on a correct view of the law.
- In our opinion such a submission is tantamount to asserting that because a person desires their intended actions to have a particular legal consequence, they are to be construed as having that consequence, no matter what their actual effect in law. This is to usurp the function of the courts and Parliament would not have intended such a consequence either at all, or certainly not without the clearest of words.
- In any event, it could not be said as a mater of fact that either West London or Shurgard intended or expected that the Property would be a capital item in the hands of West London for the purposes of the relevant regulations. The provisions to which the Appellants make reference should be given their proper meaning to be derived from the context and intent of the principles of domestic and European law from which they derive. On one point, what they intended was to try and manufacture an option-washing construct that successfully defeated the fundamental disentitlement of Shurgard to a VAT free purchase of the rental business and premises, allowing them in effect to perpetrate a 17½% rent rise for their business clientele. On another, as stated, they wished to effect the sale on terms acceptable to both parties, namely, allowing the property to "lose" its opted status and be a tax free transfer.
- It was never expected or intended that West London would carry on its business of rental using the refurbished premises in making its taxable supplies over time, so that it could be described as a capital item with the regulations in their hands.
- Regulation 112(2) does not apply to make the building works a capital item, nor does what was alleged to be intended by the parties fall within such a description because the phrase "capital item" means that concept as described in regulation 112. It is an item which the owner "uses in the course or furtherance of his business, otherwise than solely for the purpose of selling" such use, properly understood connotes use, as a capital item for making taxable supplies within the business. Not only was this not the result, it was never the intention. These refurbishment costs were incurred solely for the purpose of selling the Property and therefore could not be a capital item.
- We adopt the guidance given by the Court of Appeal in Newnham College. Lord Justice Chadwick in setting out the history of the legislative provisions in paragraphs 24 to 27 concluded :
- Finally, we would refer to paragraph 1.2 of HMRC's Notice 706/2 which states :
- Initially, the Appellants jointly appealed against two alternative assessments and a misdeclaration penalty resulting from an HMRC letter dated 15 December 2004. A substituted single assessment for £875,000 was issued on 8 April 2008 which both parties agreed was the only remaining issue before the tribunal as the Respondents had abandoned the other issues. The Appellants were not made aware of this until the eleventh hour.
- In order for completeness, the tribunal therefore allows the appeals against the earlier two alternative assessments and misdeclaration penalty in so far as the assessments relate to issues other than the £875,000.
- With reference to the remaining assessment issued on 8 April 2008:
- At the end of the hearing, both parties applied for costs. In view of the fact that both parties have been partially successful, the tribunal considers it is equitable that no order as to costs is made.
- Schedule 10 of the VATA provides relevantly for the purposes of this case as follows :
- The Value Added Tax Regulations 1995 SI 1995/2518 provide relevantly :
- VATA 1994 also provides :
- The Value Added Tax (Special Provisions) order 1995 SI 1995/1268 provides where relevant as follows :
20797
EXEMPT SUPPLIES whether election to waive exemption disapplied sale of self storage business involving freehold property whether a series of transactions involving refurbishment costs enabled the transfer of the property to be an exempt supply for VAT purposes did the capital goods scheme apply no appeal dismissed VAT Act 1994 sch 10 pp2(3AA) and 3(A)2 VAT General Regs 1995 Regs 112/113.
LONDON TRIBUNAL CENTRE
(1) SHURGARD STORAGE CENTRES UK LIMITED
(2) GRAHAM ANTHONY FARLEY and PHILIP ROBERT COX
TRADING AS WEST LONDON SELF-STORAGE CENTRE
and
THE COMMISSIONERS OF HER MAJESTY'S
REVENUE AND CUSTOMS
Appellants
Respondents
Tribunal: RODNEY P HUGGINS FCIArb (Chairman)
JOANNA M NEILL ACA
Sitting in London on 16 and 17 April, 20 and 21 May 2008.
Kevin Prosser QC and Richard Vallatt, Counsel, instructed by Deloitte & Touche LLP
Alison Foster QC and Nicola Shaw, Counsel, instructed by the Solicitor for Her Majesty's Revenue and Customs.
© CROWN COPYRIGHT 2008
DECISION
Introduction
Glossary
West London Self Storage Centre is "West London".
Shurgard Storage Centre UK Limited is "Shurgard".
"The partners"means Mr Farley and Mr Cox
"TOGC" mean "Transfer of a Going Concern",
"JTC" is James Taylor Construction Limited.
"Deloitte" is Deloitte & Touche LLP
"Nat West" is National Westminster Bank plc
"PWC" is Price Waterhouse Coopers LLP
"Paradigm" is Paradigm Management Limited
"The Freston Road Business" means the whole of the business interests . including the real property interest owned by West London and sold to. Shurgard.
"The Property" is used to refer to the real property belonging to West. London in which the partnership's business was carried out.
"The Other Assets" connotes the other property transferred by West. London to Shurgard.. . " CCE" is Commissioners of Customs and Excise
"Customs" is the term used for the Respondent Commissioners.
"HMRC" is Her Majesty's Revenue and Customs.
The Value Added Tax Act 1994 is referred to as "VATA".
"The Capital Goods Scheme" is explained in Customs Notice 742A and. 706/2 and contained in VAT General Regulations 1995, Regulations 112-. 116.
"building works" are those carried out at the Property by JTC at the. instigation of Shurgard.
The legislation
Brief Summary of the circumstances leading to the appeal
6. There were a series of transactions entered into by West London and Shurgard alleged by Customs to be a tax avoidance scheme generally known as an "option washing out" scheme. The intention of such a scheme is to achieve the tax free transfer of opted property to a new purchaser. Such a scheme relies upon anti-avoidance provisions contained in VATA to achieve this end.
The issue
The evidence
The facts
For its part Shurgard was also concerned to minimise any disruption that would lead customers to review their self-storage requirements, and to a loss of business thereby.
This document titled Final Heads of Terms was entered into on 14 May 2004 with an agreed price of a total of £7.25 million.
"VAT registration No: 653 3438 37 West London Storage Centre. (formally known as West London Business Centre)
I am writing to request clarification of the VAT treatment covering. The proposed future sale of our commercial property from which. Our business is trading under the name "West London Self Storage Centre". (WLSSC). The business/property is located at 167-185 Freston Road, . London W10 6TH. I have set out below the background information. regarding the property and the proposed sale and I need to confirm with you . the VAT treatment that should be applied to the sale.
Background
The property contains self contained storage facilities which are currently. leased to third party commercial or private customers. Each customer has. the exclusive use of their rented space and the supply is therefore deemed to . be a supply of land for VAT purposes. WLSSC exercised an option to tax. ("OTT") in respect of the property on 20 January 1995 and therefore. currently the entire rental income received is taxable at the standard rate.
As a result of our OTT we were able to recover VAT totalling £131,250 on. our original purchase of the building on 20 January 1995. The property is. therefore till a capital item for the purposes of the Capital Goods Scheme.. The property was refurbished in 1995/1996 but the cost of the refurbishment. at that time was less than £250,000, excluding VAT. Consequently no. capital item adjustments have needed to be carried out in respect of that . refurbishment.
. Proposed sale of the business
We intend to sell the business and have agreed with the prospective. purchaser, the Shurgard Self Storage Group, that some refurbishment work . needs to be carried out in order to bring the building up to specification. The. works need to be done in order to satisfy Shurgard that the property and. business will fully comply with all statutory requirements at the time they. acquire it. In short, the works are compliance with fire separation, health and. safety issues, site security and essential refurbishment. We are only prepared. to carry out these works if they are funded by the prospective purchaser.
Any further redevelopment work needed in order to customise the building. to the prospective purchaser's individual specifications will be carried out . by the purchaser and is not our responsibility. We will enter in the. necessary contract with a third party builder in order to carry out the agreed . redevelopment; our best estimate of the redevelopment work is that it will. cost £300,000 excluding VAT. We understand that this would mean that the . property will be classed as a capital item in connection with this particular. redevelopment work.
Shurgard has, however agreed that it will occupy the building in order to. operate the same kind of business as that currently carried out by WLSSC. Naturally, Shurgard will have legal occupation of the entire property.. Shurgard will also obviously actually physically occupy the office/reception. space in the building for the administration of its ongoing business and it. will (as WLSSC currently does) have complete and unfettered access to all . of the storage areas so as to be able to run its business efficiently and. properly and gain access to customer storage sites where appropriate.. However, we believe that Shurgard will, over time, partially redevelop. the site so that more space is made available for letting. Whilst Shurgard is. VAT registered, it does not wish to charge VAT to the customers that use. this site and hence will not OTT the property. We understand that this will. mean that all of its income from the customers from this site will therefore . be exempt for VAT purposes.
VAT Treatment
It is our understanding that the sale of the business should qualify. to be treated as a VAT-free transfer of a business as a going concern.. The sale of the underlying business can therefore be treated separately to. the VAT treatment that would apply to the property itself. I would. appreciate it if you could confirm that our understanding on the. straightforward issue is correct ".
"Shurgard is prepared to loan WLSSC the money necessary to fund the. works which are planned to cost approximately £350,000 (including VAT).. These works will therefore also represent a capital item for VAT . purposes."
The series of transactions
(a) an ObligationsAgreement dated 31 August 2004 whereby West. London agreed to (and did on the same day) enter into building and. consultancy contracts with JTC and Paradigm and Shurgard agreed to. pay for the works directly;
(b) an Agreement dated 1 September 2004 for the sale and purchase of . the self-storage business for £2.28 million with immediate completion. . Clause 10(1) provided that West London agreed to perform and . observe the provisions of the Agreement at (c) below;
(c) an Agreement likewise dated 1 September 2004 for the sale . and purchase of the Property for £5 million with completion to be . deferred until 31 December 2004 or (if earlier) five working days after . the date of practical completion of the works and (by Clause 16) West. London granted Shurgard a licence to occupy the Property until. completion.
(d) a building contract dated 31 August 2004 entered into between . West London and JTC as the builders.
(e) a Deed of Indemnity dated 31 August 2004 between West London. and Shurgard whereby Shurgard -
(i) indemnified West London against all outgoings and . other expenses in respect of the property;
(ii) covered the costs of West London's insurance premia in respect . of the property for the period between exchange and completion;
(iii) arranged insurance cover for West London to cover destruction of . or damage to the work during the period prior to completion and. covered the cost of the relevant insurance premia.
(f) a Deed of Account transfer of 1 September 2004 enabling Shurgard to. continue to run the self-storage business immediately by West London. transferring to Shurgard their two NatWest accounts. New customer . accounts were not necessary, nor were fresh direct debit mandates.
(g) a Deed of Collateral Warranty of Lead Consultant dated 31 August. 2004 entered into between Paradigm, Shurgard and the partners.. This gave Shurgard enforceable rights against Paradigm. It laid down . that Paradigm was obliged to accept instructions from Shurgard to the. exclusion of the partners (paragraph 8). It also provided in certain. circumstances for Paradigm to be liable to Shurgard in lieu of its. liability to the partners (paragraph 10).
(h) there were also termination agreements dated at the same time. between West London and certain of their employees who were made . redundant. A total of £65,000 was paid by Shurgard in settlement of. redundancy payments
The construction works were completed on 1 December 2004. Two things were necessary under the agreements in order for NatWest to remit the closing balance on the bond account to JTC. Firstly, Paul Lindsay of Paradigm had to certify a copy of "an interim valuation certificate", and, secondly, he had to obtain confirmation from the partners that the liability had been reduced to nil. The partners were never approached by Paradigm or anyone else previously for this purpose.
Between 1 and 9 December 2004 Shurgard carried on its business of letting storage units and arranging for tenants to resume occupation of their units moving from temporary accommodation elsewhere. On 9 December 2004 the sale of the Property was completed and the £5 million released to Mr Farley and Mr Cox.
Further communication with HMRC
The decision making Officer Richard Brown gave an alternative decision that "if the agreements were successful in separating the sale of the property from that of the business, VAT was nevertheless due on the sale of the self-storage operation in September 2004 and on the subsequent sale of the property in December 2004. Accordingly there was a split in the amount of VAT due, £393,750 for the period 09/04 and £875,000 for the period 12/04. Assessments were issued in these amounts.
The second decision was to impose a misdeclaration penalty because "the tax under-declared on both the preferred and alterative assessments exceeds the objective parameters " Officer Brown suggested the penalty could be mitigated by 5% co-operation with HMRC enquiries.
.Halifax Plc & Others v Customs and Excise Commissioners [2006] STZ 919 paragraphs 67-84
The statutory framework
"(1) VAT shall be charged on any supply of goods or services made in the . United Kingdom, where it is a taxable supply made by a taxable person in. the course or furtherance of any business carried on by him.
(2) A taxable supply is a supply of goods or services made in the United. Kingdom other than an exempt supply."
One part relates to the right to elect to waive the VAT exemption for certain supplies concerned with land (VATA section 31 and Schedule 9 Group 1 and Schedule 10). The other relates to the Capital Goods Scheme (VAT General Regulations 1995, Regulations 112-116.)
"2(3AA) Where an election has been made under this paragraph in relation to any land, a supply shall not be taken by virtue of that election to be a taxable supply if
(a) the grant giving rise to the supply was made by a person ("the. grantor") who was a developer of the land; and. (b) at the time of the grant, it was the intention or expectation of
(i) the grantor, or.
(ii) a person responsible for financing the grantor's development of. the land for exempt use,
that the land would become exempt land (whether immediately or . eventually and whether or not by virtue of the grant) or, as the case may. be, would continue, for a period at least, to be such land".
"3A(2) For the purposes of paragraph 2(3AA) above a grant made by a. person in relation to any land is a grant made by a developer of that land. if
(a) the land, or a building or part of a building on that land, is an asset. falling in relation to that person to be treated as a capital item for the. purposes of any regulations under section 26(3) and (4) providing for. adjustments relating to the deduction of input tax;
[The regulations under section 26(3) and (4) of VATA are known as "the Capital Goods Scheme".]
(b) that person or a person financing his development of the land for. exempt use intended or expected that the land or a building or part of. a building on, or to be constructed on, that land would become an . asset falling in relation to
(i) the grantor, or.
(ii) any person to whom it was to be transferred either in the course . of a supply or in the course of a transfer of a business or part of a. business as a going concern,
to be treated as a capital item for the purposes of the regulations referred. to in sub-paragraph (a) above.
unless the grant was made at a time falling after the expiry of the period. over which such regulations require or allow adjustments relating to the. deduction of input tax to be made as respects that item.
(3) In paragraph 2 (3AA), (3AAA) and 3(B) above and this paragraph. the references to a person's being responsible for financing the. grantor's development of the land for exempt use are references to. his being a person who, with the intention or in the expectation that. the land will become, or continue (for a period at least) to be, . exempted land
(a) has provided finance for the grantor's development of the land;. or
(b) has entered into an agreement, arrangement or understanding. (whether or not legally enforceable) to provide finance for the. grantor's development of the land.
(4) In sub-paragraph (3)(a) and (b) above the references to providing. finance for the grantor's development of the land are references to. doing any one or more of the following, that is to say
(a) directly or indirectly providing funds for meeting the whole or . any part of the cost of the grantor's development of the land;
(b) directly or indirectly procuring the provision of such funds by. another;
(c) directly or indirectly providing funds for discharging, in whole. or in part, any liability that has been or may be incurred by any. person for or in connection with the raising of funds to meet . the cost of the grantor's development of the land;
(d) directly or indirectly procuring that any such liability is or will. be discharged, in whole or in part, by another.
(5) The references in sub-paragraph (4) above to the provision of funds. for a purpose referred to in that sub-paragraph include references to -.
(a) the making of a loan of funds that are or are to be used for that . purpose;
(b) the provision of any guarantee or other security in relation to. such a loan;
(c) The provision of any of the consideration for the issue of any. shared or other securities issued wholly or partly for raising . those funds;
(d) any other transfer of assets or value as a consequence of which. any of those funds are made available for that purpose.
(6) In sub-paragraph (4) above the references to the grantor's. development of the land are references to the acquisition by the. grantor of the asset which
(a) consists in the land or a building or part of a building on the. land, and
(b) in relation to the grantor falls or, as the case may be, is intended. or expected to fall to be treated for the purposes mentioned in . sub-paragraph (2)(a) or (b) above as a capital item;
and for the purposes of this sub-paragraph the acquisition of an asset . shall be taken to include its construction or reconstruction and the. carrying out in relation to that asset of any other works by reference . to which it falls or, as the case may be, is intended or expected to fall, to . be treated for the purposes mentioned in sub-paragraph (2)(a) or (b). above as a capital item.
(7) For the purposes of paragraph 2(3AA), (3AAA) ad (3B) above and. this paragraph land is exempt land if at a time falling before the . expiry of the period provided in regulations made under section. 26(3) and (4) for the making of adjustments relating to the deduction. of input tax as respects that land
(a) the grantor,
(b) a person responsible for financing the grantor's development of. the land for exempt use, or
(c) a person connected with the grantor or with a person responsible. for financing the grantor's development of the land for exempt. use,
is in occupation of the land without being in occupation of it wholly or. mainly for eligible purposes.
(8) For the purposes of this paragraph, but subject to sub-paragraphs. (10) and (12) below, a person's occupation at any time of any land is. not capable of being occupation for eligible purposes unless he is a. taxable person at that time.
(9) subject to the sub-paragraphs (10)and (12) below, a taxable person. in occupation of any land shall be taken for the purposes of this. paragraph to be in occupation of that land for eligible purposes to the. extent only that his occupation of that land is for the purpose of. making supplies which
(a) are or are to be made in the course or furtherance of a business. carried on by him; and
(b) are supplies of such a description that any input tax of his which . was wholly attributable to those supplies would be an input tax. for which he would be entitled to a credit ..."
" being an item which a person (hereinafter referred to as "owner"). uses in the course or furtherance of a business carried on by him, and for. the purpose of that business, otherwise than solely for the purpose of . selling the item.".Regulation 113 provides, so far as is directly relevant
"113. the capital items to which this Part applied are items of any of the. following descriptions
" (h) a building which the owner refurbishes or fits out where the value. of the capital expenditure on the taxable supplies of services and of. goods affixed to the building, other than any that are zero-rated, made or. to be made to the owner for or in connection with the refurbishment or . fitting out in question on or after 3 July 1997 is not less than £250,000."
Cases referred to in the appeal
55. Abbey National v CCE (case C-408/98) [2001] STC 297 (Abbey National)
BUPA Purchasing v CCE [2003] STC 1203 (BUPA)
Centralian Property Limited v CCE (Case C-63/04) [2006] STC 1542
Double Shield Window Co Limited v CCE (VTD 1985)
East Kent Medical Services Limited v CCE (VTD 15785) (East Kent)
I/S Fini H v Skatteministeriat (Case C-32/03)[2005] STC 903 (Fini)
Drexlodge Limited v CCE (VTD 5614) (Drexlodge)
Halifax Plc & others v CCE [2006] STC 919 (Halifax plc)
Harbig Leasing Two Limited v CCE (VTD 16843) [2000] V&DR 469 . (Harbig)
Mayflower Theatre Trust v HMRC [2007] STC 880 (Mayflower)
Midland Bank v CCE (Case C-98/98) [2007] STC 501 (Midland Bank)
The Principal and Fellows of the Newnham College and University of . Cambridge v HMRC [2008] UKHL 23 (Newnham College)
Tucker (Inspector of Taxes) v Granada Motorway Services Limited. [1979] STC 393 (Tucker)
CCE v Upton (trading as Fagomatic) [2002] EWCA Civ 520
Verbond van Nederlandse Ondernemingen v Inspecteur der. Invoerrechten en Accijnzen (Case 51/76) [1977] 1 CMLR 413. (Verbond)
Winterthur Life UK Limited v CCE (VTD 15785)
The arguments of the Appellants
(a) the Property was an asset falling in relation to the West London as. grantor to be treated as a capital item for the purposes of the Capital. Goods Scheme Regulations (Regulations 112-116 of the VAT. regulations 1995) (paragraph 3A(2)(a)). . . [He called this the objective test.]
or
(b) West London, the grantor, or Shurgard, a person responsible for. financing West London's development of the Property for exempt. use, intended or expected that the Property would become an asset. falling in relation to West London to be treated as a capital item for. the purposes of the Capital Goods Scheme Regulations (paragraph. 3A(2)(b)).
[He called this the subjective test]
.The objective test
The subjective test
It was submitted that in paragraph 3A(2)(b) the words "intended or expected that the land would become an asset falling to be treated as a capital item" referred to the intention or expectation of a legal result, of what the land would become in law for VAT purposes, it would become a capital item within the Capital Goods Scheme.
(i) with the intention or expectation that the land will become "exempt land"
(ii) has provided finance for the grantor's development of the land.
The arguments of the Respondents
" the words 'capital goods', appearing in the third indent of Article 17 of. the Second Council Directive of 11 April 1967, on the harmonisation of laws. of member-States concerning turnover taxes, means goods used for the. purposes of some business activity and distinguishable by their durable. nature and their value and such that the acquisition costs are not normally. treated as current expenditure but written off over several years; "
She contended that the refurbishment costs did not fall within this context because the refurbishment was not a durable asset..76. Turning to the Appellants' contention that the business activities of West London continued until 9 December 2004, Miss Foster said that assumption was totally unreal. It was Customs' case that the licence entered into by West London with Shurgard in the Agreement for the sale and purchase of the Property on 1 September 2004 was not a supply. She argued that there was no consideration given for the licence, it was, in her opinion, gratuitous. She maintained that the £270,000 cost of the refurbishment was inevitably a cost element for the Property alone. It did not fall to be a capital item under Regulation 112(2) The refurbishment costs were "overheads" not capital items. The Appellants were wrong to conclude a Capital item was created by reason of the fact that the costs of the refurbishment were a component of the supply of the business (the Other Assets) or were a component of that supply.
" Section 24(1) of the Act. This defines 'input tax' as tax on the supply to. a taxable person of goods or services used or to be used for the purpose of . any business carried on by him. If the person who receives a supply of . goods or services is a taxable person, but nevertheless he does not use the. supply for the purposes of his 'business' the VAT which he pays on the. supply is not 'input tax'. 'Business' has a restricted meaning in this. connection and activities which do not involve the making of taxable. supplies, even if they would be business in the normal sense do not count as. business for VAT "
Reasons for decision
Was the Property a capital item for West London ?
* in an E mail from Deloitte dated 6 May 2004 "in all cases the funding must. be tied into the intention for the work to be done on the property whilst it is. owned by the seller and the work must be for the purchaser's benefit "
* The contents of the letter dated 14 May 2004 referred to in paragraph 24 of. this decision
* Paragraph 1.2 in Project Meeting Minutes dated 14 July 2004. "The QC advised a 90% chance [of success] if the works to the building. were completed before completion of the building purchase".
* The definition of 'Completion Date' in the Property Sales Agreement dated. 1 September 2004 is linked to the completion of the works.
* In a letter from West London to Mr Brown, a Senior Officer of HMRC. dated 31 January 2005, the following comments in paragraph B5 :. "It is important to understand that Shurgard took the view that the building. was not, in its view, in compliance with statutory requirements. During. our negotiations with Shurgard it became quite clear to us that Shurgard. was adamant that WLSSC would have to undertake significant and. material works to bring the building up to Shurgard's required standard. prior to completion of the sale of the freehold "
and then in paragraph C3/4 :
" Shurgard was therefore not prepared to take title to the freehold until . such time as certain aspects of the building were upgraded to meet. Shurgards' specifications particularly with regard to Health and Safety and. Fire Separation matters."
* Shurgard's letter to HMRC dated 23 September 2005 in paragraph 17 .
"Our own commercial objective was to ensure completion of the capital. works prior to receiving transfer of the property."
" Shurgard's concern, which they made clear to us from the onset of. negotiations, was that there was an unacceptable and avoidable risk that . the local authorities' permission to use the building for self storage could . be withdrawn if the property transferred without the refurbishment work . having been carried out. My Partner and I did not share Shurgard's view. but Shurgard was adamant that the relevant work be carried out by us. prior to sale. Consequently, it was necessary for us to reach an agreed. solution to resolve what would otherwise have been an impasse in the. negotiations for the sale of our business.
As a result, we agreed that although we would be prepared to carry out. the refurbishment works whilst the property was in our ownership, we. were not prepared to suffer the potential loss of revenue that could have. arisen as a result of the disturbance to the building. In addition, we were. not prepared to deal with the potential complaints that customers could. raise as a result of the refurbishment. We therefore agreed to phase the. transaction so as to dispose of the business whilst we undertook to . refurbish the site to meet Shurgard's needs We understand that Shurgard . will also, in due course, carry out further improvements to the building. that it thinks are required from a business enhancement perspective.
You will see from the above that my Partner and I were prepared to meet. Shurgard's demands in order to secure the sale. However, other potential. purchasers of the property were available and the additional fire. separation and health and safety works required by Shurgard would not. have made the building any more attractive to these other purchasers. As. a result, although we were prepared to meet Shurgard's demands. We were not prepared to accept the financial risk of meeting the cost of the. refurbishment."
The fact they entered into a licence with Shurgard and delayed completion of the sale until 9 December 2004 was solely to enable Shurgard to refurbish the property and obtain a VAT advantage. The letter to HMRC of 31 January 2005 makes this clear. Both Counsel have referred to the East Kent decision of Sir Stephen Oliver QC. Mr Prosser in his final address to the tribunal said that the question that had to be answered was whether West London "used" the refurbished property (albeit for nine days only) giving "use" wide construction He referred to paragraph 12 of East Kent of the decision of Sir Stephen Oliver QC and the relevant point states :
"Overall, it seems to me, the word "use" in the Capital Goods Scheme . regulations has a meaning of sufficient width to cover the different. activities and events referred to in regulation 114(4((e), each of which will. mark the start of the first interval applicable to the particular capital item.. The nature of the use may vary from item to item; the essential thing is. that it should be use by some means in the course or furtherance of the . business."
In East Kent the property was used by being leased and the circumstances were different to this appeal. We have found West London did not continue in economic activity after disposal of its storage business. The question of "use" by the partners does not in our view arise..92. The licence (which was set out in clause 16 of the Agreement dated 1 September 2004 for the sale and purchase of the Property granted by West London had no consideration attributed to it. The Appellants accepted through Mr Prosser that the grant of the licence was not a supply in its own right. The licence was the method by which Shurgard carried out the refurbishment and also carried on the self storage business before completion of the transfer of the Property. It was not in our opinion a form of economic use of the refurbished Property by West London. For the reasons stated its business was ended entirely after 1 September 2004.
The Subjective Test
"It is clear that the object of the restriction is to preserve the basic . principle that an exempt business should bear input tax on supplies made. to it by being denied the opportunity to treat that tax as allowable tax. giving rise to a VAT credit."
In the same case which was appealed to the House of Lords [2008] UKHL 23 Lord Mance, as one of the Judges in the majority, confirmed that their reasoning substantially corresponded with the judgment of Chadwick LJ.
"You should read this notice if you acquire, create or construct capital . items for use in your business and on which you incur input tax. The aim of . this scheme is to provide a fair and reasonable attribution of input tax to. taxable supplies. Items of capital expenditure can be used in your business . over a period of years. Over the years the extent to which you use these in. making taxable supplies can vary "
The relevant parts of HMRC's Notice 706/2 are set out in Annexe 3.
We consider neither West London or Shurgard were entitled to rely on the notice as they did not comply with the necessary regulations.. .Decision
(1) The tribunal dismisses the joint appeal against the assessment for. £875,000 VAT plus interest. (2) Therefore, paragraph 2(3AA) of Schedule 10 VATA did not operate . to disapply West London's option to tax relating to the Property. so the transfer of the property to Shuragrd was a taxable supply and . not an exempt supply nor to be disapplied under the TOGC Rules..
Costs
Rodney P Huggins
Chairman
Release date : 17 September 2008
LON/2006/0192
LON/2006/0151
ANNEXE 1
Relevant legislation
Paragraph 2 provides :
"2(1) ....
(3AA)
Where an election has been made under this paragraph in relation to any land. A supply shall not be taken by virtue of that election to be a taxable supply if -
(a) the grant giving rise to the supply was made by a person ("the grantor") who was a developer of the land;and(b) at the time of the grant .... it was the intention or expectation of(i) the grantor, or(ii) a person responsible for financing the grantor's development of the land for exempt useThat the land would become exempt land (whether immediately or eventually and whether or not by virtue of the grant) or, as the case may be, would continue, for a period at least, to be such land."
Paragraph 3A provides :
3A -
(1) This paragraph shall have effect for the construction of paragraph
2(3AA) .... above.
(2) For the purposes of paragraph 2(3AA) .... above, a grant made by any person in relation to any land is a grant made by a developer of that land if -
(a) the land or building or part of a building on that land is an asset falling in relation to that person to be treated as a capital item for the purposes of any regulations under section 26(3) and (4) providing for adjustments relating to the deduction of input tax;
(b) that person or a person financing his development of the land for exempt use intended or expected that the land or a building or part of a building on, or to be constructed on, that land would become an asset falling in relation to -
(i) the grantor;(ii) any person to whom it was to be transferred wither in the course of a supply or in the course of a transfer of a business or part of a business as a going concern, to be treated as a capital item for the purposes of the regulations referred to in sub-paragraph (a) above, unless the grant was made at a time falling after the expiry f the period over which such regulations require or allow adjustments relating to the deduction of input tax to be made as respects that item.
(3) In paragraph 2(3AA) and (3B) above and this paragraph the references to a person's being responsible for financing the grantor's development of the land for exempt use are references to his being a person who, with the intention or in the expectation that the land will become, or continue (for a period at least) to be, exempt land -
(a) has provided finance for the grantors development of the land;or(b) has entered into an agreement, arrangement or understanding (whether or not legally enforceable to provide finance for the grantor's development of the land.
(4) In sub-paragraph (3)(a) and (b) above the references to providing finance for the grantor's development of the land are references to doing any one or more of the following, that is to say -
(a) directly or indirectly providing funds for meeting the whole or any part of the cost of the grantor's development of the land;(b) directly or indirectly procuring the provision of such funds by another;(c) directly or indirectly providing funds for discharging, in whole or in part, any liability that has been or may be incurred by any person for or in connection with the raising of funds to meet the costs of the grantor's development of the land;(d) directly or indirectly procuring that any such liability is or will be discharged, in whole or in part, by another.
(5) The references in sub-paragraph (4) above to the provision of funds for a purpose referred to in that sub-paragraph include references to -
(a) the making of a loan of funds that are or are to be used for that purpose;(b) the provision of any guarantee or other security in relation to such a loan;(c) the provision of any of the consideration for the issue of any shares or other securities issued wholly or partly for raising those funds;(d) any other transfer of assets or value as a consequence of which any of those funds are made available for that purpose.
(6) In sub-paragraph (4) above the references to the grantor's development of the land are references to the acquisition by the grantor of the asset which -
(a) consists in a land or a building or part of a building on the land,and,(b) in relation to the grantor falls, or, as the case may be, is intended or expected to fall to be treated for the purposes mentioned in sub-paragraph (2)(a) or (b) above as a capital item; and for the purposes of this sub-paragraph the acquisition of an asset shall be taken to include its construction or reconstruction and the carryout out in relation to that asset of any other works by reference to which it falls or, as the case may be, in intended or expected to fall, to be treated for the purposes mentioned in sub-paragraph (2)(a) or (b) above as a capital item.
(7) For the purposes of paragraph 2(3AA), (3AAA) and (3B) above and this paragraph land is exempt if, at a time falling before the expiry of the period provided in regulations made under section 26(3) and (4) for the making of adjustments relating to the deduction of input tax as respects that land -
(a) the grantor,
(b) a person responsible for financing the grantor's development of the land for exempt use, or
(c) a person connected with the grantor or with a person responsible for financing the grantor's development of the and for exempt use, is in occupation of the land without being in occupation of it wholly or mainly for eligible purposes.
(8) For the purposes of this paragraph, but subject to sub-paragraphs (10) and (12) below, a person's occupation at any time f any land is not capable of being occupation for eligible purposes unless he is a taxable person at that time.
(9) Subject to sub-paragraphs (10) and (12) below, a taxable person in occupation of any land shall be taken for the purposes of this paragraph to be in occupation of that land for eligible purposes to the extent only that his occupation of that land is for the purpose of making supplies which -
(a) are or are to be made in the course or furtherance of a business carried on by him; and
(b) are supplies of such a description that any input tax of his which was wholly attributable to those supplies would be input tax for which he would be entitled to a credit.
"112(2_ Any reference in this Part to a capital item shall be construed as a reference to a capital item .... being an item which a person .... uses in the course or furtherance of a business carried on by him and for the purposes of that business, otherwise than solely for the purpose of selling the item."
113. The capital items to which this Part applies are items of any of the following descriptions -
(h) .... a building which the owner refurbishes or fits out where the value of the capital expenditure .... is not less than £250,000.
114.(1) The proportion (if any) of the total input tax on a capital item which may be deducted under Part XIV shall be subject to adjustments in accordance with the provisions of this Part.
(2) Adjustments shall be made over a period determined in accordance with the following paragraphs of this regulation.
(3) The period of adjustment relating to a capital item of a description falling within -
(a) regulation 113(a) shall consist of 5 consecutive intervals,
(b) regulation 113(b), where the interest in the land, building or part of the building or civil engineering work or part of the civil engineering work in question has less than 10 years at the time it is supplied to the owner, shall consist of 5 successive intervals, and
(c) any other description shall consist of 10 successive intervals,
determined in accordance with paragraphs (4) to (5B) and (7) below
(4) Subject to paragraphs (5A), (5B) and (7) below, the first interval applicable to a capital item shall be determined as follows -
(a) where the owner is a registered person when he imports, acquires or is supplied with the item as a capital item, the first interval shall commence on the day of the importation, acquisition or supply and shall end on the before the commencement of his tax year following that day;
(b) where the owner is a registered person when he appropriates to use an item as a capital item, the first interval shall commence on the day he first so uses it and sshall end on the day before the commencement of his tax year following that day;
(c) where the capital item is of a description falling within regulation 113(c), the first interval shall commence on the day the owner's interest in, right over, or licence to occupy, the building or part of the building is treated as supplied to him under paragraph 1(5) of schedule 10 to he act and shall end on the day before the commencement of his tax year following that day;
(d) where the capital item is of a description falling within regulation 113(d), the first interval shall commence on the later of the following days -
(i) 1st April 1990
(ii) the day the owner first uses the building (or part of the building) and shall end on the day before the commencement of his tax year following the day of commencement of the first interval;
(e) where the capital item is of a description falling within regulation 113(e), (f), (g) or (h), the first interval shall commence on the day the owner first uses the building or the altered building or the extension or annex or the civil engineering work or the building which has been refurbished or fitted out in question, and shall end on the day before the commencement of his tax year following that day;
(f) where the owner is not a registered person when he first uses an item as a capital item, and subsequently -
(i) becomes a registered person, the first interval shall correspond with his registration period, or
(ii) is included among bodies treated as members of a group under section 43 of the Act, the first interval shall correspond with, or be that part still remaining of, the then current tax year of that group.
5. Subject to paragraphs (5A), (5B) and (7) below, each subsequent interval applicable to a capital item shall correspond with a longer period applicable to the owner, or if no longer period applies to him, a tax year of his.
(5A) On the first occasion during the period of adjustment applicable to a capital item that the owner of the item -
(a) being a registered person subsequently becomes a member of a group under section 43 of the Act;
(b) being a member of a group under section 43 ceases to be a member of that group (whether or not he becomes a member of another such group immediately thereafter) ; or
(c) transfers the item in the course of the transfer of his business or part of his business as a going concern (the item therefore not being treated as supplied) in circumstances where the new owner is not, under regulation 6(1) above, registered with the registration number of an in substitution for the transferor,
the interval then applying shall end on the day before he becomes a member of a group or the day that he ceases to be a member of the group or transfers the business or part of the business (as the case may require) and thereafter each subsequent interval (if any) applicable to the capital item shall end on the successive anniversaries of that day.
(5B) Where the extent to which capital item is used making taxable supplies does not change between what would, but for this paragraph, have been the first interval and the first subsequent interval applicable to it and the length of the two intervals taken together does not exceed 12 months the first interval applicable to the capital item shall end on what would have been the day that the first subsequent intervals expired.
(6) ....
(7) Where the owner of a capital item transfers it during the period of adjustment applicable to it in the course of the transfer of his business or a part of his business as a going concern (the item therefore not being treated as supplied) and the new owner is, under regulation 6(1) above, registered with the registration number of, and in substitution for the transferor, the interval applying to the capital item at the time of the transfer shall end on the last day of the longer period applying to the new owner immediately after the transfer or, if no longer period then applies to him, shall end on the last day of his tax year following the day of transfer."
"4. Scope of VAT on taxable supplies
(1) VAT shall be charged on any supply of goods or services made in the United Kingdom where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.
(2) A taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply.
5. Meaning a supply : Alteration by Treasury order.
(1) Schedule 4 shall apply for determining what is, or is to be treated as, a supply of goods or a supply of services.
(2) Subject to any provisions made by that Schedule and to Treasury orders under subsections (3) to (6) below -
(a) "supply" in this Act includes all forms of supply, but not anything done otherwise than for a consideration;
(b) anything which is not a supply of goods but is done for a consideration (including, if so done, the granting, assignment or surrender of any right) is a supply of services.
(3) The Treasury may by order provide with respect to any description of transaction-
....
(c) that it is to be treated as neither a supply of goods nor a supply of services;
....
"5(1) Subject to paragraph (2) below there shall be treated as neither a supply of goods nor a supply of services the following supplies by a person of assets of his business -
(b) their supply to a person to whom he transfers part of his business as a going concern where -
(i) that part is capable of a separate operation
(ii) the assets are to be used by the transferee in carrying on the same kind of business, whether or not as part of any existing business, as that carried on by the transferor in relation to that part, and
(iii) in a case where the transferor is a taxable person, the transferee is already or immediately becomes as a result of the transfer, a taxable person ...."
ANNEXE 2
The Letter of Advice from Deloitte & Touche dated 26 April 2004 sets out their understanding of an advice in relation to the proposed transaction as follows :
"PURCHASE OF THE WEST LONDON SELF STORAGE (WLSS) PROPERTY
Following our discussion, you have asked us to provide a more detailed explanation of the VAT issues and possible solution in connection with the proposed purchase of the WLSS property. Our advice is based on our understanding of the proposed transaction, which for completeness I have detailed below. If any part of our understanding is incorrect please advise accordingly as any alteration could affect the VAT position.
Background
The WESS property is currently owned by a partnership. The property contains an office/reception area and the relevant storage facilities which are currently leased to third parties. The storage facilities are self-contained areas, and are therefore deemed to be a supply of land for VAT purposes, as opposed to a supply of facilities. As a result, the supply of the storage facilities together with the office facilities will be exempt from VAT, unless an option to tax ("OTT") is exercised, which would the make the supply taxable for VAT purposes. A breakdown of the current type of storage tenants shows a 40:60 split between commercial and private tenants.
WLSS has exercised an OTT in respect of the property, and as mentioned above, the lease of the property and storage facilities is therefore taxable at the standard rate of VAT. It is understood that the OTT was made to allow WLSS to recover the VAT incurred on the initial purchase of the property in 1995. The property was refurbished, probably in 1995 or 1996, but the cost of the refurbishment was less than £250,000 excluding VAT.
The property was originally deemed to be a capital item for the purposes of the VAT capital good scheme ("CGS") and hence the ten-year adjustment cycle is still in force. Depending on the date of the acquisition, and the date of sale to Shurgard, one or two CGS intervals may still be outstanding. However, as the refurbishment work was for less than £250,000, excluding VAT, this renovation should not fall into the CGS regime.
The property and business are valued at £7,250,000 (excluding VAT) but no breakdown is yet available to apportion the value of the property and the business carried on within it.
Proposed Purchase of the Business and Property from WLSS.
Shurgard is looking to purchase the property and the business currently operated by WLSS without a VAT charge. In addition, Shurgard does not want to charge VAT to future tenants of the property. The sale of the entire business would be treated as a VAT-free transfer of business as a going concern ("TOGC") is Shurgard OTT the site. This is not acceptable and hence. In order to achieve a VAT-free transaction in respect of the property, the OTT exercise by WSS would not be disapplied. I have set out in the attached appendix an arrangements which could allow this to be achieved.
I must point out that C&E are taking a much more forceful approach when challenging structures that they consider to be VAT planning. There is therefore a real likelihood that C&E will review closely any arrangement they consider that its sole purpose is to mitigate a VAT cost to the business. That said, if WLSS accepts this arrangement it is hard to see how Customs would wish to challenge the arrangements given that it involves their own specific anti-avoidance measures. Also, at the end of the day, it does not result in any VAT loss to Customs because WLSS would be required to refund the relevant proportion of the VAT it recovered under its original CGS claim and Shurgard would not be able to recover any VAT on any refurbishment work it carried out. Finally, Customs state that they will only ordinarily attach arrangements that have no substance other than the avoidance of VAT. Seeing as Shurgard will be funding the redevelopment the arrangements will have solid commercial substance involving genuine and tangible supplies between third parties.
Appendix
Description of arrangement
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Prior to the sale of the property and business, the following would happen:
The property must be brought, once more, within the Capital goods scheme ("CGS") so far as WLSS is concerned. In order to achieve this WLSS must incur or have the intention of incurring costs of more than £250,000 (exclusive of VAT) on the redevelopment of the property. To achieve this WLSS would need to enter into a development agreement for the refurbishment of the building, for a cost of in excess of £250,000 excluding VAT. WLSS will not ebb required to actually complete this work before selling the property because the development agreement can be assigned to Shurgard. However, it is strongly recommended that WLSS should carry out all of the work otherwise the arrangement could look artificial and is therefore more open to attack by C&E.
Shurgard will agree to fund the refurbishment of the property being undertaken by WLSS. The funding for the refurbishment must be in excess of £250,000 excluding VAT and again it would be preferable (but not essential) if this amount was paid to WLSS prior to obtaining the freehold because this would make the scheme less open to attack by C&E.
A funding agreement should be out in place between WLSS and Shurgard. The funding agreement should state that the purchase of the property from WLSS was conditional on certain works being carried out and that Shurgard would fund the costs involved. As mentioned above, the refurbishment work must be in excess o0f £250,000, excluding VAT. Any VAT incurred on the refurbishment costs will be an irrecoverable cost.
Shurgard will not elect to OTT the property.
As Shurgard will be seen to be funding the refurbishment, the OTT exercised by WLSS will be disapplied because of the wording of relevant anti-avoidance legislation. The legislation states that an OTT is disapplied if a person funding a property is to be in "occupation of the land without being in occupation of it wholly or mainly for eligible purposes". As Shurgard is not going to OTT the property, all of its income from the property lettings will be exempt and therefore WLSS's OTT of the property is disapplied and the sale of the property becomes an exempt supply.
Any consideration attaching to the sale of the rental business should still be treated as VAT-free transfer of a going concern("TOGC") on the basis that WLSS's supplies after the funding agreement is in place will be exempt, and Shurgard will not OTT. To reinforce TOGC status Shurgard should utilise a VAT registered company to complete the acquisition.
The wording of the contract for the sale of the property will need to be worded in such a way that can protect Shurgard and WLSS's position. The contract should state one of the following :
the sale of the property will be exempt and the sale of the leasing business will be treated as TOGC on the condition that WLSS obtains a clearance letter from C&E, or
the purchase of both the property and the business is for a VAT inclusive price which will be conditional on WLSS receiving clearance from C&E.
WLSS should be able to rely on a written clearance received from C&E provided the full facts have been disclosed to them.
WLSS may, subject to timing, be able to obtain pre-transaction clearance from Customs that the OTT will be disapplied due to the funding by Shurgard and that the business transfer qualifies as a TOGC in it own rights. Deloitte can provide a suitable draft letter for WLSS to consider sending to Customs. If so, we would need to ascertain such things as the date WLSS originally OTT, when the CGS adjustment period started, etc. If WLSS prepares its own clearance letter to C&E we would strongly recommend that the clearance letter is reviewed by Deloitte before it is sent to Customs.
The following legal document should be drafted:
A development agreement between WLSS and a building contractor, which must be in excess of £250,000, excluding VAT.
A funding agreement between WLSS and Shurgard which must show that Shurgard is funding the refurbishment for a cost exceeding £250,000 excluding VAT.
The sale agreement for the sale of the property/business which must show that the property is transferred subject to the redevelopment funded by Shurgard.
ANNEXE 3
Relevant Parts of HMRC's Notice 706/2
Capital Goods Scheme
1.1 What is this notice about ?
This notice explains how the capital goods scheme works and which items are covered by the scheme ...
1.2 Who should read this notice ?
You should read this notice if you acquire, create or construct capital items for use in your business and on which you incur input tax. The aim of this scheme is to provide a fair and reasonable attribution of input tax to taxable supplies. Items of capital expenditure can be used in your business over a period of years. Over the years the extent to which you use these in making taxable supplies can vary ...
1.3 How does the scheme work ?
The scheme allows for adjustments to be made to the initial amount of input tax claimed. This reflects the differences in the use of capital goods over a period of time. This period is known as the 'adjustment period'. If, during the adjustment period there is any change in the proportion of taxable use then you must make an adjustment to your input tax to take account of this.
1.4 When does the scheme not apply ?
The scheme does not apply if :
* the assets are acquired solely for resale; or
* you spend money on assets which are solely for resale; or
* assets are acquired, or you spend money on assets, wholly used for non-business purposes.
...
3.1 What items are covered by the scheme ?
The items covered are those listed below which have been acquired or created unless otherwise stated :
* the interest supplied to an owner in land, a building or part of a building;
* a building or part of a building which is subject to a self-supply;
* goods and services received in constructing a building;
* goods and services received in altering a building or constructing an extension or annex;
* the interest supplied to the owner, or the goods and services received in constructing a civil
engineering work;
* capital expenditure on supplies of services and of goods affixed to the building in refurbishing or fitting out a building;
...
All Capital items refer to values pf £250,000 (net of VAT) or more.
3.3 Refurbishments
A building which the owner refurbishes or fits out where the value of capital expenditure on supplies of services and of goods affixed to the building in connection with the works is £250,000 or more.
Refurbishments and fitting out works were included in the scheme with effect from 3 July 1997.
4.9 What should I include in the value if a capital item is refurbished or fitted out ?
You should only include the value of the capital expenditure on the taxable (other than zero-rated) supply of services and of goods affixed to the building supplied to you for or inconsideration with the refurbishment of fit out.
You should include all costs involved in making the refurbished or fitted out building ready for occupation.
...
4.10 What is "capital expenditure" ?
If you carry out refurbishment or fitting out works and those works are of lasting benefit to your business or increase the value of your business assets, the expenditure is likely to be capital expenditure.
If for accounting purposes the expenditure is added to the cost of the assets it will be capital expenditure. If it is treated as a cost in calculating profit and loss in your annual accounts then it will not be capital expenditure.
...