Douglas Virtue & Sonia Virtue

20259

Value Added Tax; single or multiple supplies; Sale of land; sale of plots of land; fully “serviced site”; civil engineering works; whether sale of plots of land with facility to connect to service utilities is one supply or two supplies; whether exempt supply- yes; or exempt and standard rated supplies- no; zero-rating- work “in the course of construction of a building designed as a dwelling”; VATA sections 4, 30, 31 Schedule 8 Group 5 Item 2 & 4; Schedule 9 Group 1 Item 1.

EDINBURGH TRIBUNAL CENTRE

DOUGLAS VIRTUE & SONIA VIRTUE

T/A LAMMERMUIR GAME SERVICESAppellant(s)

- and -

THE COMMISSIONERS FOR

HER MAJESTY’S REVENUE & CUSTOMS Respondents

Tribunal: (Chairman): J Gordon Reid, QC., F.C.I.Arb.,

(Members): R L H Crawford, BA., CA., CTA

S A Rae, LLB., WS

Sitting in Edinburgh on Wednesday 6 June 2007

for the Appellant(s)Mr Charles K Rumbles

for the RespondentsMiss Natasha Durkin, Shepherd & Wedderburn, WS

© CROWN COPYRIGHT 2007.

1

DECISION

Introduction

1.This appeal relates to the sale of “serviced” plots of land in a development to “DIY housebuilders”. The sale price reflects the fact that the site, following various civil engineering works is “serviced,” enabling the individual plots to connect up to such services on or within contiguous or adjacent land. The broad issue in the appeal is whether the sale to each such DIY housebuilder constitutes a single supply or several supplies for the purposes of VAT, and the consequent VAT treatment applicable to the supply or supplies.

2.The appeal was heard at Edinburgh on 6th June 2007. The Appellants were represented by Charles K Rumbles, the RCB Partnership, Livingston. He led the evidence of Robert D Virtue, one of the partners of the Appellants. The Respondents (HMRC) were represented by Natasha Durkin, solicitor, Shepherd & Wedderburn, solicitors, Edinburgh. She led no evidence. A joint bundle of documents was produced; several photographs of the site (produced by Mr Rumbles without objection) were added to the bundle at the start of the hearing. There was no dispute as to the authenticity and where appropriate, the transmission and receipt, of the documents (including the photographs).

Grounds of Appeal

3.The Appellants contend that the supply of the land and the civil engineering services should be considered as a single supply. The supply was therefore exempt in terms of Item 1, Group 1 of Schedule 9 to the Value Added Tax Act 1994. Alternatively, the Appellants contended that if there were two supplies, one of land and one of civil engineering services, then the supply of land was exempt; and the supply of civil engineering services fell to be zero rated, having been supplied in the course of the construction of a building designed as a dwelling in terms of Items 2 & 4 of Group 5 to Schedule 8 to the 1994 Act.

Statutory Framework

4.Section 31 of the 1994 Act makes provision under reference to Schedule 9 for supplies to be treated as exempt supplies. The grant of a personal right to call for the grant of an interest in or right over land i.e. missives for the sale of heritable property, and the grant of the interest itself are such supplies (Schedule 9 Item 1 Group 1). The statutory right to elect to waive the exemption and to opt to tax is disapplied by Schedule 10 paragraph 2(3)(b) where the grant is made to an individual and the land is to be used for the construction of a building intended to be used by him as a dwelling and not in furtherance of his business.

5.Section 30 of the 1994 Act applies a zero rate of VAT to various supplies of goods and services, specified in Schedule 8. Group 5 of the Schedule relates to the construction of buildings. Item 2 includes:-

“The supply in the course of the construction of-

(a)a building designed as a dwelling…

……………..

of any services related to the construction…………”

6.Section 35 makes provision for the refund of VAT chargeable on goods (not services) used for the purposes of the construction of a building designed as a dwelling.

Facts

7.The Appellants are a partnership. The partners are MrVirtue and his wife, Sonia. The partnership was registered for VAT in 1980. The firm carried on business as farmers, but has long since diversified into other more specialised areas, in particular the rearing and sale of game birds for sale as food and for sale to shooting estates. The firm owns land in the vicinity of the village of Westruther, Berwickshire. Westruther is about 14 miles from Kelso and about 10 miles from Earlston.

8.Game birds are reared in the open. The land they occupy eventually becomes contaminated after about ten years; the birds have to be moved to “new pastures”. The Appellants purchased a 12 acre field in the vicinity of Westruther in about 1989. It was narrow and more or less rectangular in shape. It was used for rearing game birds. In due course, it became contaminated. The Appellants decided to sell the land (the “site”). Mr Virtue’s intention was that it would be developed for housing in keeping with the rural setting of the area.

9.Mr Virtue was a civil engineer by profession and had many years experience in that discipline. His intention was to install services and roads within the site and sell various plots to individuals who would then build the houses on the plots in conformity with a detailed design brief which would form part of the planning permission which he hoped to obtain.

10.The Appellants engaged a chartered building and planning surveyor. He prepared a business plan. They prepared a Design Guide or brief [B/14], which was discussed with and approved by the planning authority, and applied for outline planning permission. Outline planning permission was granted between 2002 and 2005 for fifteen plots [B/19]. Fifteen plots are identified on the plan produced [B/19 last sheet]. The Appellants’ intention was that the houses would be sympathetic to and compatible with traditional houses in the area.

11.After outline planning permission was granted, the Appellants engaged contractors to carry out site preparation and infrastructure works. The principal contractor was Rodger (Builders) Ltd, Earlston (the “civil engineering contractor”). They were engaged to (i) carry out preparatory works including earthworks (ii) construct the site or spine road to the standard required by the Roads Authority (Scottish Borders Council), and (iii) construct associated drainage. The local authority installed lighting for the site. The Appellants did not install any services within the boundaries of any of the individual plots. Scottish Water, either by themselves or through their own contractors, have laid an arterial water pipe, and sewerage pipes along the edge of the spine road. Scottish Power have laid electricity cables in similar fashion. This will enable the plot owners to “connect up” to these services at or about the boundary of the individual plots. These construction works and the installation of these services are an essential part of the construction of buildings designed as dwellings. Absent these works and services, the buildings could not function as modern dwellings. Essential facilities would be lacking and access would be well nigh impossible.

12.The civil engineering contractor submitted an invoice dated 29/4/04 [B/4] in the sum of £13,983.05. Although registered for VAT, no VAT was claimed on the invoice. Under the column for VAT was the word zero. This was a claim for an interim payment for what was described as Phase 1 Works. This related to earthworks and the installation of drains. Further sums were claimed by the civil engineering contractor in June 2004 (£19,436.97), July 2004 (£36,562.48) and November 2004 (£46784.88). No VAT was claimed and these sums were all treated by the civil engineering contractor as zero rated. These and various other outgoings are summarised in a document prepared by the Appellants’ accountant [B/10].

13.The civil engineering works have not yet been completed. The Appellants are under obligation to the roads authority to apply a blockwork finish to the road once dwellings have been erected on all the plots. The Appellants have taken out a performance bond with the Royal Bank of Scotland plc to guarantee that the road works will be completed.

14.In due course the plots were marketed for sale. Production B/5-8 was treated by the parties as an example of the missives for the sale of a plot. The documents are incomplete. Clauses 7 and 8 of the offer provide as follows:-

“7The sellers will make up, construct and install as appropriate, the roads, kerbs, foot pavements, street lighting, drains and sewers within and serving the development of which the plot is part, to the standard required by Scottish Borders Council, and will exhibit such Road Bond or evidence of a deposit in lieu thereof, as is required by Scottish Borders Council.

8Before the date of entry the sellers will make available within the Plot or in the roadway adjacent thereto, connections to mains electricity and water, and to the main sewer. It will be the responsibility of the purchasers to arrange with the appropriate authority to make the actual connections thereto and to pay any charge for such connections.”

15.Clause 9 of the offer obliged the purchaser to construct a house and garage in accordance with a Deed of Conditions and the Design Guide mentioned above [B/14]. B/9 is the Completion Statement in relation to the purchase of Plot 6. The sale price was £95,000. No separate sum was charged to reflect the fact that the site was “serviced”. No amount was identified within the sum of £95,000 to reflect the fact that site was “serviced” or that facilities existed to enable services to be led from the site to the dwelling to be erected on the plot.

16.Following a routine visit, HMRC raised a query about the VAT treatment of the sale of what was described as the serviced plots [letter dated 8/2/06 B/15]. Correspondence with the Appellants’ advisers ensued. By letter dated 13/7/06 to MrRumbles [B/20], HMRC stated inter alia that

“The supplies (to individuals) were the sales of serviced plots of land. The land sales will be exempt, and the value of the services will be standard rated for VAT purposes.

I would suggest that output tax is due on the value of the services, and it would be my intention to raise a VAT assessment to the partnership ”

17.The Appellants requested a reconsideration of that decision. By letter dated 28/11/06 [B/22], the appeals and reconsideration officer agreed with the original decision. The letter stated inter alia as follows:-

“With regard to the supply of land with incidental civil engineering works, the Vat liability is that – where the freehold sale of land is ancillary to the supply of new or part completed civil engineering works, this is a single standard rated supply.

But where the new or part completed civil engineering works are incidental to the supply of land, the supply is treated as an exempt supply of land (with the option to tax) and a standard rated supply of civil engineering work. This policy allows the supplier to reclaim input tax on the construction of the civil engineering work, which would not otherwise be possible.

The policy remains in place following the recent judgments of the ECJ and the House of Lords in the case of Card Protection Plan Ltd (CPP). This is because in the case of civil engineering works from the exemption (VAT Act 1994 schedule 9, group 1, items 1(a) (iii) and (iv)) is allowed under Article 13(B)(b) of the Sixth Directive, and is regarded as overriding any single supply argument which may be derived from the judgment.

You have stated in your letter that VAT Act 1994, Schedule 8 applies. As you are aware, Lammermuir are not “the builders”. I would refer to VAT Act 1994, Schedule 8, Group 5, Item 1 “The first grant by a person (a) constructing a building….”. As agreed, Lammermuir do not have “constructing status”. Therefore this section would not apply.

VAT Act 1994, Schedule 8, Group 5 Item 2 “The supply in the course of the construction of …”. Again, this cannot apply as it is restricted to the supply in the course of construction of a building designed as a dwelling. Again, there is not a building the course of construction as the plots of land are supplied bare (apart from the installed civil engineering works).

The St Marys RC Church Trust introduces a temporal element in that (in order that zero rating may apply) the work must be closely connected to the construction of the building – however, it is specifically stated in para 3.3.6 of Public Notice 708 that among the examples of services that are standard rated are those “for a building (water, electricity, etc) which are installed on land which is to be sold as building land”.

“In summary, your client cannot zero rate the supply of the civil engineering works as VAT Act 1994 schedule 8 does not apply. The supply of serviced plots of land is actually two supplies; one of land, being exempt and one of civil engineering works which are standard rated.”

18.Subsequently an assessment was issued (after the appeal to this Tribunal was lodged) on or about 23/1/07 in the sum of £20,104 plus interest. It is based on the view, expressed in a document appended to HMRC’s letter dated 16/1/07 [B/23] that the value of the services on the sales in the year to 31/10/04 is £135,000 and that the VAT liability for that year is £30,106 (£135,000 x 7/47). How the figure of £135,000 is arrived at cannot be determined on the evidence.

Submissions

19.Miss Durkin helpfully produced written submissions for HMRC which she amplified. In summary, she submitted that there were two supplies, one of land and one of engineering works. These were two distinct principal services to the DIY market. The supply of the engineering works by the appellants was not as a means of better enjoying the principal supply of land but rather as an aim in itself for the DIY customer. Payment of a single price was not determinative. The intention of the customer was relevant. If there are two supplies the engineering works fall to be standard rated. The engineering works did not as a matter of fact, relate to supply in the course of construction of a building.

20.She departed from the position of HMRC as set out in the letter dated 28/11/06 [B/22-referred to in paragraph 17 above]. The policy therein set forth had been in place prior to the decision in Card Protection Plan v CC&E 1999 STC 270; 2001 STC 174. It benefited the housing market generally. She explained the practical operation of the policy thus:- the landowner contracts for some initial engineering services which are standard rated; he sells to a developer who is registered for VAT, and charges VAT on the engineering services. The developer recovers that VAT as input tax. The cost is not passed on to the house buyer as the first grant of a dwelling is zero rated (1994 Act Item 1 Group 5 Schedule 8). If the transaction is wholly exempt, then the VAT paid by the landowner for the engineering works will be passed on to the developer and to the house buyer as a hidden cost. In relation to DIY builders, the VAT remains with them as they cannot reclaim it; although they can obtain relief under section 35 of the 1994 Act.

21.She submitted that if the whole supply is treated as exempt then there is a risk that irrecoverable VAT on the engineering works would be passed on as a hidden cost to the eventual house buyer. Under reference to Card Protection Plan v CC&E 1999 STC 270 at paragraph 29 and 30 and 2001 STC 174, paragraph 22 she submitted that the essential features of the transaction here are the supply of land and the discrete supply of certain engineering works. What is not being sold is a plot with added extras; it is a package which relates directly to the DIY market. The fact that there is a single price is not determinative. Talacre, (referred to below by Mr Rumbles,) is not of general application.

22.In relation to the Appellants’ alternative argument, she submitted that the Appellants had to establish that the supply of the civil engineering works was in the course of construction of a building; the sale to individual purchasers broke the chain of causation so that there was no ongoing “course of construction” within Items 2 and 4 of Group 5 of Schedule 8 to the 1994 Act. She relied on C&CE v St Mary’s RC High School 1996 STC 1091 at 1094 for the proposition that there had to be a temporal connection between the construction of the building and the provision of the services in question. Here, there was no necessary connection between the works and the buildings. The building of the houses was outwith the control of the Appellants. The sales to DIY builders broke the chain of events. Purchasers were under no obligation to build. Reference was also made to Simon Brown v CC&E MAN19884 18/10/06, Chairman Colin Bishopp. The civil engineering contractor was in error in zero rating their supplies of civil engineering services.

23.For the Appellants, Mr Rumbles submitted that there was a single supply of land. He drew our attention to various statutory provisions including sections 4, 30, 31, and 35 of, and Items 2 & 4 of Group 5 of Schedule 8, Item 1 of Group 1 of Schedule 9, and paragraph 2(3)(b) of Schedule 10 to the 1994 Act; and to Articles 2(1), 13B(b) and 28 of the EC 6th Directive 77/388/EC. He pointed out that section 35 applied to goods not services and that the Appellants were not entitled to waive the exemption and opt to tax because of the provisions of Schedule 10 paragraph 2(3)(b).