Gateshead Talmudical College v HMRC
Upper Tribunal Finance and Tax Chamber 2011 UKUT 131 (TCC)
This is an appeal by Gateshead College against the decision of the First-tier Tribunal.
The Upper Tribunal concluded that Capital Goods Scheme (CGS) adjustments were required when rental payments and VAT accounting stopped less than two years into a lease and leaseback arrangement.
CGS is a mechanism for regulating deductibility over the “VAT-life” of a capital good. For VATpurposes a capital good is a developed property. The scheme operates by ensuring that the deductibility for a property reflects the use to which the property is put over the VAT-life (adjustment period) of the property.
Facts
The main activity of Gateshead College is the provision of education. The background to this matter is the building of an extension by Gateshead College. Gateshead College leased these premises to a property company called Starburst Properties Ltd. Starburst on the same day granted a sublease over the same premises to Gateshead College. Gateshead College had registered for VAT two months earlier and had described its business as that of “property letting”. Both Gateshead College and Starburst elected to waive the VAT exemption over these premises.
Gateshead College then took credit for the input tax on its construction costs relating to these premises and this led to a VAT repayment for Gateshead College. However, after an initial period of less than two years the lease payments and the VAT accounting stopped. In addition, Starburst was dissolved and struck off the company register. Gateshead College took no action to forfeit the lease the benefit of which became vested in the Crown as bona vacantia.
HMRC assessed Gateshead College for failure to make adjustments under the CGS and Gateshead College appealed to the First-tier tax Tribunal.
At the First-tier Tribunal HMRC successfully argued that the making of taxable supplies had been reduced to nil once Starburst had been dissolved (as it could not be the recipient of any supplies). In addition the ceasing in the making of taxable supplies had given rise to the requirement to make a CGS adjustment. Gateshead College unsuccessfully argued that the continued existence in law of the lease meant that taxable supplies continued to be made after the initial period.
The arguments
Gateshead College appealed to the Upper Tribunal on the basis that the First-tier Tribunal had erred in law.
Gateshead College made two arguments. Firstly, it argued that the First-tier Tribunal had been wrong to include that no supplies were being made under the lease because the parties has stopped abiding by its terms and one of the parties had ceased to exist. Gateshead College contended that it had continued to make supplies despite its failure to seek payment of rent.
Gateshead College also argued that that the First-tier Tribunal had wrongly concluded that an adjustment under the CGS should have been made because of a decrease in the making of taxable supplies. Gateshead College argued that CGS adjustments are triggered not by the reduction in the value of taxable supplies but by a change in the extent of the use of the capital item for making taxable, as distinct from exempt supplies.
The decision
The Upper Tribunal dismissed Gateshead College’s first argument. The Upper Tribunal accepted the lease existed as an item bona vacantia but that did not alter the fact that no rent was paid and accounted for after a period of less than two years. A supply, i.e. rent, was therefore not being made once Starburst was struck off.
With regard to the “change of use” argument. The Upper Tribunal stated, as had the First-tier Tribunal, that it was “completely untenable” to maintain this argument. The parties had stopped abiding by the lease and the payment of rent had been abandoned completely. Gateshead College’s argument that the premises were used exclusively for leasing supplies, despite there being no actual rental charges or payment nor any intention of any being made, could not be sustained.
