Holiday home developer wins VAT case against taxman

HOLIDAY HOME DEVELOPER Lower Mill Estate has successfully appealed against a ruling from HMRC over VAT charges on construction services, according to accountancy firm Grant Thornton.

The Upper Tier Tribunal has confirmed that the use of separate companies to supply the land and construction elements of a development project is not an abusive practice, said Lorraine Parkin, head of VAT at Grant Thornton UK.

This means that the separate supply of the construction services can be provided VAT free, according to Grant Thornton.

“HMRC will often attack arrangements that purport to separate elements of a transaction, especially where one or more of those elements are supplied without the addition of VAT,” Parkin said. “In this case, HMRC argued that the customer had bought a completed holiday home which was subject to VAT at the standard rate. However, by separating the sale of the land from the supply of the construction services, the building work could benefit from zero-rating and consequently provide a significant VAT saving.”

The First Tier Tribunal had earlier found that the separation of the land and construction elements into two separate contracts, supplied by two related companies, was an “abuse” of the VAT system. By structuring the project in that way, the Tribunal agreed with HMRC that a tax advantage accrued which was contrary to the purpose of the European Union VAT legislation, Grant Thornton said.

“The case demonstrates that if robust evidence exists to support the commercial rationale for undertaking a particular transaction in a particular way, it will be extremely difficult for HMRC or the courts to find that the arrangements are ‘abusive’,” Parkin added.