On 14 September 2017, the ECJ held7 that a taxable business may deduct input tax on renovations provided free of charge to a third party if:
• the services are not ‘excessive’ (ie in excess of what is needed to allow the business to carry on its taxable transactions)
• the cost of the services is reflected in the price of those taxable transactions.
The ECJ disagreed with the Advocate General’s (AG) opinion, noting that, in the particular circumstances of the case, the taxpayer would not have been able to carry on its taxable business (the renting out of holiday premises, once built) without the renovations (to an existing public authority waste-water pump station) being carried out. In the view of the ECJ, the fact that the public authority also benefitted from the work was not fatal to the input tax claim.
The ECJ’s decision will be welcomed by property developers, who would have been alarmed by the earlier AG opinion in this case. That earlier opinion called into question current published HMRC practice, that where a property developer has reached agreement with a local authority, for example under a ‘planning gain agreement’, the developer is not regarded as making a supply to the local authority (with the developer’s input tax on construction works generally being viewed as attributable to the developer’s taxable supplies).
The decision can be viewed here.