In a ruling which underlines the wisdom of seeking professional advice on the potentially complex and unforeseen tax implications of property sales, developers have succeeded in persuading the First-tier Tribunal (FTT) that the sale of a refurbished former children’s home to an educational charity was exempt from VAT.
The developers, who had originally intended to convert the building into offices, had opted to tax the property under schedule 10 of the VAT Act 1994 with a view to reclaiming the costs of the refurbishment as input tax. That option remained in place when the sale to the charity was completed; however, the developers treated the sale as exempt from VAT.
HM Revenue and Customs (HMRC) argued that the purchase should have been subject to VAT at the standard rate and raised a substantial assessment against the developers. However, the latter argued that, notwithstanding the option, the sale was exempt from VAT in that the charity’s intention had been to use it purely for residential purposes as a boarding school.
After the sale, the developers had repaid to HMRC the input tax that it had previously reclaimed in respect of refurbishment costs on the basis that the sale of the property had been an exempt supply. However, in arguing that the option remained binding on the developers, HMRC pointed out that, in the event, the charity had not used the property as a residential school but rather for administrative and other purposes.
The FTT noted that it would have been wise for the developers to have obtained a certificate from the charity prior to the sale, clearly stating its intention to use the property for exempt residential purposes. However, in allowing the developers’ appeal, the FTT found that, on the basis of public statements made by HMRC, there was no legal requirement for such a certificate.
On the evidence, the FTT found that, at the time of the sale, the charity had intended to use the property as a residential school and that the developers had reasonably believed that that was the purpose for which it was being purchased.