Indirect Tax Weekly Update for week ending 05 February 2016

1. © 2015 Grant Thornton UK LLP. All rights reserved.
ITU
Summary
In general terms, VAT law states
that for a supply (of goods or
services) to be within the scope
of VAT it must be done for
consideration. There are
exceptions, but generally, if there
is no consideration for a supply
then there is no supply at all. If
there is no supply, there cannot
be a taxable supply and, as a
result, there can be no recovery
of input tax. The case of
Norseman Gold Plc is a prime
example of that rule.
The Wellcome Trust case
considers whether costs incurred
on the refurbishment of a
building can be reclaimed using
the Lennartz mechanism.
The TGH (Construction) Ltd
case considers whether the zero-
rate can apply to the construction
of a workshop built at the same
time as another qualifying
building but which is also used to
service other existing buildings
not constructed at the same time.
10 February 2016
Norseman Gold Plc – Upper Tribunal
As if prospecting for gold was not expensive enough, the taxpayer in this case cannot
reclaim the input VAT it had incurred because it was not making supplies for
consideration.
Norseman Gold Plc registered for VAT in the UK as an 'intending trader' – meaning
that, although it did not yet make any taxable supplies, it intended to do so at some
point in the future. As a holding company, it was involved in the management of its
subsidiaries and incurred input VAT on various costs which it intended to recharge to
those subsidiaries. However, in the circumstances – the subsidiaries were prospecting
for gold in Australia and had, at that point, no sources of income – the holding
company took a decision that there was no point invoicing for its supply of
management services until such time as the subsidiaries were in a position to pay.
The First-tier tax Tribunal (FTT) took the view that this decision was fatal to the
company's claim for input tax. One of the golden rules of VAT is that for input tax to
be reclaimed, it has to be attributable to a taxable supply. Unfortunately, whilst
Norseman Gold Plc's supply of management services to its subsidiaries were capable
of being regarded as taxable supplies, in the absence of any consideration paid or
payable by the subsidiaries, those supplies could not be regarded as taxable supplies
and, as a result, the input tax could not be reclaimed.
At the Upper Tribunal, the taxpayer argued that it was sufficient for there merely to be
an intention to pay something at some future point for the supply to be regarded as a
taxable supply for VAT purposes. However, the Upper Tribunal agreed with the FTT
that, at the time the input VAT was incurred, no consideration had been contemplated
by the subsidiaries. It was not enough to say that that the consideration would be
determined at a later date. Accordingly, the FTT had reached the right decision and the
Upper Tribunal also dismissed Norseman's appeal.
Comment – The amount of VAT at stake in this case is not huge. The
arguments were more about principle than quantum. Businesses, especially
holding companies, should note that, for VAT purposes, a supply is defined as
'something done for consideration'. This case emphasises that determination of
the value of the consideration and when it will be paid is a very important factor
in determining whether a supply actually takes place. Without consideration,
there is generally no supply.
Issue05/2016
Going for gold!
Indirect Tax Update

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GRT100456
The Wellcome Trust
First-tier Tax Tribunal (FTT)
This is a complex case. The Wellcome Trust spent a large sum of money acquiring a property and
refurbishing an existing property on Euston Road in London. At the time, it took the view that the
buildings would be used 3% for its business purposes and 97% for its non-business purposes. The
non-business activity undertaken by the Trust was the management of its substantial investment
portfolio – a fact determined in earlier litigation by the European Court of Justice in 1996.
The issue in the case concerned the deduction of the VAT incurred on the acquisition and
refurbishment costs under a mechanism known as 'Lennartz'. Relying on the ECJ's 1996 ruling that
the investment management activities of the Trust were not 'economic' activities, the Trust submitted
that it was entitled to deduct all of the input VAT incurred (rather than only the 3% it had claimed)
because any 'private use' (or non-business use) would be taxed (and thus, effectively, disallowed) over
a much longer timescale.
The Tribunal disagreed. It did not consider that the ECJ's 1996 judgment meant that the Trust's use
of the buildings for investment management purposes constitutes 'private' use. The buildings were
used by the Trust for the purposes of its charitable objectives and this was not a 'private' use. As a
consequence, recovery of input VAT through the Lennartz mechanism was not possible.
Comment
Prior to changes in the
law in 2010, where an
asset was purchased
that was to be used for
both business and non-
business (including
private) purposes, input
tax could be reclaimed
in full. The private use
was taxed in each
subsequent period
where the asset was
used for a non-business
purpose.
The Trust's case related
to a period before the
change of law.
TGH (Construction) Ltd
Comment
This seems like a
sensible decision. Had
the workshop been
constructed as an
integral part of the
Holme Terrace
building there would
have been no question
that it qualified for
zero-rating even
though it may have also
been used to support
the maintenance of
other buildings on the
site.
The case demonstrates
that, in some cases, it is
worthwhile to challenge
HMRC's view of the
law.
First-tier Tax Tribunal
The issue here was whether the construction of a maintenance workshop could benefit from zero-
rating for VAT purposes. UK law states that, in cases where more than one building is being
constructed at the same time, zero-rating can apply only if they are built on the same site and they are
intended to be used together as a single unit for a relevant residential purpose.
The problem with the workshop was that it was used not only with a newly constructed relevant
residential building (Holme Terrace), but it was also used with other existing buildings on the site.
HMRC took the view that the legal conditions were not met and that the workshop was, as a result,
standard rated. The appellant argued that the zero-rating conditions were met. Whilst it was true that
the workshop was used in conjunction with other buildings, the fact remained that it was used
together with the Holme Terrace building as a single unit for a relevant residential purpose.
The Tribunal agreed with the taxpayer. It concluded that Holme Terrace and the workshop were
'used together'. The question to resolve was whether such use was as a single unit. On this point, the
Tribunal concluded that the buildings formed a single unit. The fact that the workshop was also used
to support an existing building did not, in the Tribunal's view, prevent the workshop and Holme
Terrace from being a unit as between themselves. Accordingly, the construction of the workshop
qualified for zero-rating.
Contact
Stuart Brodie Scotland stuart.brodie@uk.gt.com (0)14 1223 0683
Karen Robb London & South East karen.robb@uk.gt.com (0)20 772 82556