PGPH Ltd v Revenue and Customs (VAT - EXEMPT SUPPLIES : Land)

Factual and Procedural Background

This appeal concerns a dispute between Company A (Appellant) and the Commissioners for Her Majesty's Revenue and Customs (Respondents) regarding the refusal of input tax credits claimed by Company A. Company A was engaged in a property business in the healthcare sector and had acquired a leasehold interest in a property which it had opted to tax under Part 1 Schedule 10 of the Value Added Tax Act 1994. The dispute arose following Company A’s grant of a right to use the property to Company B, after which Company A undertook refurbishment works.

HMRC initially denied input tax credits on the basis that Company A was not making or intending to make taxable supplies. Subsequently, HMRC amended their position to rely on the disapplication provisions in paragraphs 12 to 17 of Schedule 10, which prevent the option to tax applying where certain conditions are met, including where the grantor is a developer and the land is exempt land.

The appeal covered multiple VAT return periods from February 2014 to November 2015, with a total VAT reclaim of £184,630.61 disputed. The Tribunal conducted a detailed fact-finding exercise including witness evidence from Company A’s directors and HMRC officers, and examined documentary evidence relating to the property, the refurbishment, funding arrangements, and the relationship between Company A and Company B.

Company A’s business model was to provide serviced medical premises similar to a Regus office model but for medical professionals. Company B was incorporated simultaneously with Company A and occupied the premises, providing medical services exempt for VAT purposes.

The key procedural history includes Company A’s VAT registration and exercise of the option to tax, HMRC’s refusal of input tax credits, correspondence and meetings between the parties, and the eventual appeal to the First-tier Tribunal Tax Chamber.

Legal Issues Presented

1. Whether Company A was a developer of the land for the purposes of paragraphs 12 and 13 of Schedule 10 VATA, specifically whether at the date of grant Company A intended or expected the land to be a relevant capital item (i.e., that refurbishment expenditure would exceed £250,000).
2. Whether the exempt land test was met, that is, whether at the time of the grant the land was, or was expected to become, exempt land occupied by a relevant person not wholly or substantially wholly for eligible purposes.
3. Whether Company B was connected with a development financier (specifically, whether the financier had control of Company B within the meaning of s1122 CTA 2010).
4. Whether the option to tax was disapplied by operation of paragraphs 12 to 17 of Schedule 10, rendering the supplies to Company B exempt rather than taxable.

Arguments of the Parties

Appellant's Arguments

• Company A contended it was not a developer because the property was not a relevant capital item at the date of the grant, as there was no firm plan for expenditure exceeding £250,000 on refurbishment works.
• The actual expenditure incurred was £233,000, supported by invoices and accounts, below the threshold for the Capital Goods Scheme.
• Expenditure on equipment should not be aggregated with building works for the purpose of the capital item test.
• Reliance was placed on the decision in Water Property Limited v HMRC, which held that separate phases of expenditure could not be aggregated if financed separately and uncertain at acquisition.
• Company A argued that the intention or expectation required for the developer test should include some knowledge or understanding of the Capital Goods Scheme and its adjustment period.
• It was submitted that the anti-avoidance provisions could not apply where actual expenditure was below the threshold, as this would render the disapplication indefinite and unworkable.
• Regarding the exempt land test, Company A submitted that at the date of the grant there was no expectation that Company B would be connected with a development financier or that such a financier would provide funding.
• Company A argued that neither the grantor nor the financier had the requisite knowledge of the Capital Goods Scheme or anti-avoidance rules, and thus the disapplication provisions should not apply.

Respondents' Arguments

• HMRC submitted that Company A was a developer because at the date of grant there was an intention or expectation to incur capital expenditure exceeding £250,000 on refurbishment, making the land a relevant capital item.
• It was argued that the intention or expectation does not require knowledge of the Capital Goods Scheme or legal characterisation of the expenditure.
• HMRC contended that the grant was made at an eligible time, within the adjustment period, and that there was a single refurbishment project rather than separate phases.
• HMRC relied on s1122 CTA 2010 to establish that the financier (Mr Barnes) was connected with Company B by virtue of control, including control as a loan creditor entitled to receive the greater part of assets on winding up.
• HMRC argued that the financier became a development financier when providing finance with the expectation that the land would become exempt land, and that Company A intended or expected this connection and funding arrangement at the date of grant.
• The Respondents submitted that the option to tax was disapplied by paragraphs 12 to 17 of Schedule 10, rendering the supplies to Company B exempt and justifying refusal of input tax credits.

Table of Precedents Cited

Court's Reasoning and Analysis

The Tribunal first considered whether Company A was a developer under paragraphs 12 and 13 of Schedule 10. The key test was whether, at the date of the grant (assumed to be 12 March 2014), Company A intended or expected the land to be a relevant capital item, meaning that refurbishment expenditure would be at least £250,000. The Tribunal found that the evidence indicated a single refurbishment project rather than multiple phases, and that the intention or expectation was subjective and related to whether the expenditure would result in a capital item as defined in the VAT Regulations.

The Tribunal rejected the appellant’s argument that knowledge of the Capital Goods Scheme was required for the intention or expectation test, emphasizing that the test is factual and does not depend on legal understanding. It further rejected the argument that the disapplication rules could only apply if actual expenditure exceeded the threshold, holding that the rules apply based on intention or expectation at the time of grant.

The Tribunal found the appellant’s evidence on expenditure and intentions to be inconsistent and unpersuasive, concluding that by early March 2014 Company A intended or expected to incur refurbishment expenditure exceeding £250,000.

Next, the Tribunal considered the exempt land test, which required that at the time of grant the land was or was expected to become exempt land occupied by a relevant person (grantor, development financier, or connected person) not wholly or substantially wholly for eligible purposes. The Tribunal focused on whether the financier (Mr Barnes) was connected with Company B and whether he was a development financier.

The Tribunal found that Mr Barnes became a development financier when he provided a loan to Company A in August 2014 with the intention or expectation that the land would become exempt land. The Tribunal reasoned that the financing was used for the refurbishment and that Mr Barnes was aware of the nature of the occupation by Company B.

Regarding connection, the Tribunal applied s1122 CTA 2010 and related provisions, concluding that Mr Barnes was connected with Company B from at least March 2014, both as a person entitled to acquire control and as a loan creditor entitled to the greater part of Company B’s assets on winding up. The Tribunal found that Mr Barnes had actual control or was entitled to acquire control, supported by an agreement with the existing shareholders and directors, and by his role as the principal financier.

The Tribunal then assessed whether Company A intended or expected at the date of grant that Mr Barnes would provide finance and become connected with Company B. It concluded that Company A did have such an intention or expectation, based on the close business relationship, discussions, and the practical realities of the funding arrangements.

Accordingly, the Tribunal held that the exempt land test was met and that the disapplication provisions applied, meaning the option to tax did not apply to the grant to Company B.

Holding and Implications

The Tribunal DISMISSED the appeal by Company A.

The effect of this decision is that the supplies made by Company A to Company B pursuant to the grant were not taxable supplies due to the disapplication of the option to tax under paragraphs 12 to 17 of Schedule 10 VATA. Consequently, the input tax credits claimed by Company A were not recoverable. The decision directly affects the parties’ VAT liabilities for the periods in dispute but does not establish any new binding precedent beyond the application of the existing statutory provisions to the facts of this case.