Lower Mill Estate v HMRC

Factual and Procedural Background

This opinion concerns an appeal by the Appellant, Company A, against a VAT assessment issued by the Respondents, the Commissioners for Her Majesty's Revenue and Customs ("HMRC"). The VAT assessment related to transactions involving the supply of holiday homes on land owned by Company A at a development site in The City. The development involved Company A granting long leases for plots of land to customers, who then contracted with Company B, a construction company under common ownership with Company A, to build holiday homes on those plots. HMRC contended that the transactions should be treated as single supplies of completed holiday homes for VAT purposes, whereas Company A argued that there were separate supplies of land and construction services. The First-tier Tribunal dismissed Company A's appeal, finding that although there were separate supplies, the arrangements amounted to an abusive practice under the principle established in the Halifax case. Company A appealed this decision to the Upper Tribunal.

Legal Issues Presented

1. Whether the supplies of leases of land by Company A and construction services by Company B should be treated as separate supplies or as a single supply of completed holiday homes for VAT purposes.
2. Whether the arrangements constituted an abusive practice under the first and second limbs of the Halifax principle, thereby justifying recharacterisation of the VAT treatment.
3. What is the proper comparator for assessing whether a tax advantage has been obtained contrary to the purposes of the VAT Directive and domestic legislation.

Arguments of the Parties

Respondents' Arguments

• The contractual documents showed separate agreements for leases by Company A and construction by Company B, but the VAT supply should be characterised by economic reality, not merely contract form.
• Based on case law including Reed Personnel Services and Part Service, the transactions should be treated as a single indivisible economic supply or as joint supplies by Company A and Company B.
• The arrangements resulted in a VAT advantage by zero-rating construction services, which distorted competition compared to developers who sell completed holiday homes as a single supply.
• The relationship between Company A and Company B, including common ownership and joint marketing, supports finding abusive practice under the Halifax principle.

Appellant's Arguments

• Company A owns the land and grants leases; Company B separately provides construction services, with distinct reciprocal contractual relationships with customers.
• Binding precedent from Telewest precludes treating separate supplies by separate suppliers as a single supply for VAT purposes.
• The Tribunal erred in law in recharacterising the transactions as abusive and in selecting the comparator of large commercial developers selling completed homes.
• There were genuine commercial reasons, including capital constraints, for adopting the "self-build" model involving separate supplies rather than the development model.

Table of Precedents Cited

Court's Reasoning and Analysis

The Court began by addressing the question of whether the transactions constituted a single supply or separate supplies for VAT purposes. It relied heavily on binding precedent from Telewest, which establishes that separate supplies by separate suppliers cannot be combined into a single supply absent abuse or sham. The Court found no basis to depart from this principle and rejected HMRC's contentions that Company A and Company B's transactions could be treated as a single supply or joint supply.

Turning to the abuse issue under Halifax, the Court examined the two limbs required to establish abusive practice: (1) whether the transactions resulted in a tax advantage contrary to the purpose of the VAT Directive and domestic legislation, and (2) whether the essential aim of the transactions was to obtain that tax advantage.

The Court scrutinised the comparator used by the First-tier Tribunal, which was the model of large commercial developers selling completed holiday homes. It found no evidential basis or reasoning to justify this comparator as the relevant normal commercial operation. Instead, the Court accepted evidence that Company A's "self-build" model, involving separate supplies of land and construction services, was a genuine commercial choice driven by capital constraints and other legitimate business reasons.

Accordingly, the Court concluded that the First-tier Tribunal erred in law by failing to properly identify the correct comparator and by not adequately addressing the commercial reasons for the self-build model. The Court held that where transactions are genuinely structured as separate supplies by separate suppliers, and where there are legitimate commercial reasons, the first limb of Halifax is not satisfied, and therefore no abusive practice arises.

On the second limb, the Court found that the evidence did not establish that the essential or principal aim of the arrangements was to obtain a tax advantage, given the accepted commercial rationale for the structure.

The Court also considered procedural and evidential criticisms of the First-tier Tribunal's decision, noting deficiencies in fact-finding and reasoning, and exercised its power to remake the decision on the basis of the facts found and additional findings consistent with statutory provisions.

Finally, the Court addressed the position of Company B, concluding that it was not liable for VAT assessments as its supplies were zero-rated construction services, and that any formal appeal requirements could be accommodated to reflect this outcome.

Holding and Implications

The appeal by Company A is ALLOWED.

The Court held that the supplies made by Company A of leases of land and by Company B of construction services are separate supplies for VAT purposes and that the arrangements do not constitute abusive practice under the Halifax principle. The First-tier Tribunal's decision was set aside due to errors of law and inadequate reasoning regarding the comparator and commercial purpose analysis.

The direct effect is that the VAT assessment against Company A is overturned, and Company B is not liable for VAT on the construction services supplied. No new precedent was established; rather, the decision reaffirmed existing legal principles regarding single supply characterization and the application of abusive practice doctrine in VAT law.