The challenge of what constitutes immovable property

The VAT treatment of the Supply of Land (again)

Everyone is aware of how important it is to understand the tax treatment of the supply of land. Guidance is provided in VAT Notice 742: land and property 2.2 which defines the supply of land as:

“You make a supply of land by making a grant of an interest in, right over or licence to occupy land in return for a payment or consideration”. 

What sounds so simple in such an explanation is extremely complex in terms of all tax consideration, not just in income tax terms regarding trading or not trading for income tax but also in the context of inheritance tax (IHT) and VAT. For all tax advisers and landowners, decisions are challenging. 

Much has been discussed within the domain of the tax tribunal concerning the supply of land for VAT purposes. While some might see contradictions, others might see a very clear need for clarification.

Sibcas and Immovable Property

The Upper Tier (UT) decision in CRC v Sibcas Ltd [2017] UKUT 0298 went against the decision of the FTT. The facts were that part of a secondary school had been condemned and temporary accommodation was needed until permanent arrangements were made. Sibcas supplied a two-storey temporary school building comprising three interlinked blocks. The building was used for 32 months.

The issue was whether the supply was exempt as a letting of immovable property (VATA 1994, Sch 9 Pt II group 1 item 1), as contended by HMRC. The First-tier Tribunal (FTT) had allowed Sibcas Ltd’s appeal that it was not an exempt supply and therefore the supply was subject to standard-rate VAT.

The Upper Tribunal were of the view a building would be immovable property if it was fixed to or in the ground. However, the Court of Justice of the EU had not prescribed the circumstances in which a building was fixed or in the ground. Further, the letting of a building could be immovable property even if the land on which the building stood was not included in the letting (Rudolf Maierhofer v Finanzamt Augsburg-Land (Case C-315/00)). Overall, the issue had to be determined by considering the characteristics of the building and its relationship with its site. 

Characteristics of Building

In the Sibcas case, the temporary school was a single integrated building – physically and functionally. The UT decided that the FTT should have focused on the building as a whole, not the individual components that were assembled and amalgamated to form the building. The building had substantial foundations and was held firmly in position on those foundations by the large compressive force that it exerted on them. It was connected to services which ran through the ground. The supply was therefore exempt for VAT purposes. 

Cannot be moved

The UT concluded that “the building could not feasibly be moved without being dismantled, and it could not be easily dismantled and moved”. It therefore was an exempt supply. The judge said the approach of the FTT had been incorrect. The UT considered that the FTT “had failed to adopt a holistic approach to the entire building”, but “identifying what constitutes immovable property in borderline cases remains as challenging as ever”. 

The problems suffered by those trying to decide on the supply of property for both IHT and VAT purposes is highlighted by this decision. If the FTT can be confused over whether the supply of land is just the property or with added services, it shows the issues faced by the tax adviser and the landowner. 

Difficult to understand complexity

For anyone who “lost the plot” on the journey to the decision, the supply in the UT ruling was that the supply was exempt. When looking at the challenge of marginal, there are a number of exceptions to the supply of land being exempt, which again might be considered difficult to understand. For example, the supply of the following are standard-rated.

• Tent pitching and camping facilities
• The rights to fell and remove timber
• Holiday accommodation
• Facilities for sports or physical recreation
• Self-storage

These examples of supplies are all standard-rated and mainly because they are either “moveable” and/or require services of added value to be provided by the landowner.

The help of income tax advisers, VAT consultants and inheritance tax advisers are needed every time a farmer or landowner decides to diversify or plan alternative land use in an entrepreneurial manner. 

Further review of the grey area or fine line between the supply of land or the supply of a serviced business is a necessity supported by research and evidence. For example, Vigne v HM Revenue & Customs (HMRC) showed how having sufficient document evidence of the service provide was able to obtain business property relief for enhanced livery. However, Ross (Executors of the Estate of M Ross (Deceased) v HMRC [2017] UKFTT 507)) showed that in spite of the provision of additional services, the business would not qualify for IHT. The irony is that the Vigne case which qualified for BPR would have no doubt been an exempt supply. In the Ross case, as it related to holiday accommodation, standard-rate VAT would have applied.

Perhaps greater clarification is needed by HMRC on this grey area subject at a VAT and IHT level. With Brexit talks reaching a climax, farmers and landowners need to understand what their legal, professional and tax position is with regard to any diversification they undertake. If a farmer/landowner moves from pure farming by way of diversification into livery services, holiday accommodation or the supply of land/buildings, there needs to be clear definition of how the tax and VAT rules apply. With current low profitability, plus farmers trying to adjust to the practical and economical ramifications of the change from pure farming, tax definition and tax guidelines are needed.

It is very difficult for those in the farming community who were raised with zero VAT on agricultural products plus agricultural property relief (APR) for all farming activities, to adjust to the now complex world where the tax disadvantages might not match the advantages of the income streams. The farmers need strong advice regarding the positive advantages of the increased profitability that could be at the sacrifice of tax savings. Everything needs to be looked at ‘in the round’.

It is the role of the professional adviser to provide the correct tax warnings against the background of possible improved income streams. The whole strategy must be looked at with a holistic approach. 

Julie Butler F.C.A, Butler & Co
Farming & Rural Business Community, December 2017