In SiBCAS Ltd v HMRC [2018] CSIH 9 XA81/17, the Court of Session has held that the provision of temporary school accommodation is subject to VAT. In considering the contract of supply, the Court of Session concluded that the transaction of erecting, letting and dismantling temporary classrooms at a school was an entrepreneurial activity and did not constitute the passive letting of immovable property within the VAT exemption.

Background

SiBCAS Ltd (the taxpayer) supplied a temporary building to a school to act as a stop-gap until permanent arrangements could be made to replace part of the school which had been condemned. The supply was initially for 24 months, but lasted for 32 months.

The structure was two storeys high, with three interlinked blocks comprising 66 units which were clipped or clamped together to create the 19 classrooms required by the school. The taxpayer carried out the foundation work, including cutting tarmac, digging trenches, laying fresh stone and levelling beams. The structure took 29 days to assemble and 98 days to dismantle.

The taxpayer charged the school VAT on its supplies of the temporary accommodation. The school believed that no VAT should have been charged and referred the issue to HMRC. HMRC agreed that the supply was exempt from VAT as it involved “the leasing or letting of immovable property” pursuant to Article 135(1)(l) of the Principal VAT Directive (2006/112/EC) (the Directive). The Directive was implemented into UK law by VATA. Schedule 9, VATA, provides that “the grant of any interest in or right over land or of any licence to occupy land” is exempt from VAT. The taxpayer appealed to the First-tier Tribunal (FTT).

The issue to be determined was whether the taxpayer’s supply of temporary accommodation was exempt as a letting of immovable property. If it was not immovable property, VAT at the standard rate would be chargeable. 

The FTT agreed with the taxpayer. In the view of the FTT, immovable meant fixed to, or in the ground, so each unit had to be considered in isolation. The units could be easily disconnected, dismantled and moved quickly, and could not therefore be treated as a letting of immovable property. HMRC appealed to the Upper Tribunal (UT).

The UT allowed HMRC’s appeal. The FTT had taken an unduly restrictive view of fixed to, or in the ground, by considering individual components, rather than the building as a whole. The only reasonable conclusion was that the building was fixed to, or in the ground as there were substantial foundations used to secure the buildings, there was connection to services which ran through the ground, and the building could not be moved without difficult dismantling.

The taxpayer appealed to the Court of Session.

Court of Session judgment

The appeal was allowed.

The Court of Session held that the taxpayer’s supply of accommodation was not an exempt supply of land pursuant to Group 1, Schedule 9, VATA.

In the view of the Court of Session, the UT had been correct in determining that the structure had to be considered as a whole, rather than interlinked units. However, the Court considered the primary focus should have been on the purpose of the exemption and a consideration of the entire circumstances of the supply, and not just the physical properties of the structure in order to understand the substance of the commercial supply undertaken.

Relevant factors included the terms of the contract between the taxpayer and the school, the duration of the supply, and whether any interest in the land was conveyed or leased.

The contract involved the design, transportation and construction of “temporary classroom accommodation” on the school’s own land, payment of rental for the accommodation for a minimum, but ultimately limited, 24 month period and the removal of the temporary classroom facilities at the end of the period. The contract provided for a supply which was economic in nature, for the purposes of the application of VAT, which negated the consideration that the structure itself was immoveable. In light of the contractual terms, the units were undoubtedly movable property and the FTT decision was reinstated. VAT was correctly charged on the supply.

Comment

The VAT treatment on supplies relating to land and buildings is often an area of dispute with HMRC. In taking the legal relationship between the parties and the contractual terms into consideration, this decision provides greater certainty for taxpayers as to the VAT status of a letting transaction. The physical connection of structures to land is no longer the only factor to be considered.

A copy of the judgment can be viewed here