The long-running litigation concerning VAT recovery on white goods by developers has reached a conclusion in the Upper Tribunal with Taylor Wimpey denied recovery except for one item for a brief period.
One of the fundamental challenges with VAT is that new products are created every day, but VAT law evolves slowly. This was demonstrated in the recent Upper Tribunal decision in February 2018 with Taylor Wimpey, where it was necessary to delve into the past to establish specifically when cooker extractor hoods became standard kitchen fittings, and when microwaves started moving off the work surface into a fitted cabinet.
What was the issue?
UK VAT legislation provides that the first sale of a new house or flat by a developer is zero-rated. This means that no VAT is charged to the purchaser, but the developer is normally able to recover any VAT it has incurred. It has always been recognised that this created a potential unfair treatment in respect of certain items, in particular carpets and ‘white goods’. The reasoning is that someone purchasing a new flat for £495,000 and then spending £5,000 plus VAT for appliances pays a total of £501,000 to own a home they can live in. By contrast, someone paying £5,000 more for a flat with all the appliances built-in only pays £500,000 in total.
To deal with this, the developer is blocked from recovering VAT on such items; the logic being that, in this example, the developer would pass on this £1,000 VAT cost to the purchaser, and increase the total price for a fully-fitted new flat to £501,000.
The legislation dealing with this is known as the ‘Builder’s Block’ has been in place since the introduction of VAT in the UK in 1973, although it has been through a number of iterations since then. The dates of these updates of the legislation were critical to some parts of the Upper Tribunal’s recent decision.
The legislation, as it is now drafted, prevents a developer from recovering VAT on goods incorporated into a new building, unless these items fall within the definition of ‘building materials’. To qualify as ‘building materials’, goods firstly have to be items ordinarily incorporated into the relevant type of building, and secondly they must not be on a list of precluded items (which includes most white goods).
Taylor Wimpey challenged this as being incompatible with EU law and made a claim for the period since the introduction of VAT in 1973 to 30 April 1997, amounting to more than £60 million. If UK law was found to be consistent with EU law, it also challenged that various items had been incorrectly blocked from VAT recovery. Claims by various other developers are stacked-up behind this case.
Similar rules apply to those obtaining construction services and materials to build new homes on their own land. A builder zero-rates not only their construction services, but also building materials they incorporate, so any change in the definition of these terms also affects the amount of VAT such landowners incur.
The Upper Tribunal’s decisions
There had been two First-tier Tribunal hearings in this case in June 2014 and February 2015, and the Upper Tribunal released its main decision in February 2017. It held that the ‘Builder’s Block’ was compatible with EU law. Having confirmed it was, there followed a lengthy discussion on the meaning of the terms ‘incorporated’ and ‘ordinarily incorporated’. The conclusions removed the bulk of the items from Taylor Wimpey’s original VAT claim, but a few items remained for discussion. As Taylor Wimpey and HMRC have been unable to agree the treatment of these, the parties have had to return to court and the Upper Tribunal has now released its second decision.
The Upper Tribunal has adopted a fairly wide definition of when an item is incorporated, leaving only microwave ovens that were just placed on a work surface and plugged in. However, it found no evidence that these had ever been standard in Taylor Wimpey homes in practice.
The Upper Tribunal has also applied a generous definition of ‘ordinarily’, deciding this meant only that an item was commonplace, rather than the First-tier Tribunal’s definition something that was part of the majority of homes. This interpretation meant that the only point to consider was whether a cooker extractor hood was something out of the ordinary in the early 1980s. The Tribunal concluded they were not, and from 1980 until 1 June 1984 (when they were added to the list of excluded items) this VAT could be recovered. There was no evidence that these items were installed in the 1970s.
Given the amounts at stake, the Upper Tribunal’s decision may well be appealed. Any developer who has submitted VAT reclaims on the same basis with HMRC pending this decision, may now be able to get a small proportion of this paid, if cooker extractor hoods and microwaves were part of the claim, but may be forced to give up on the rest of the claim to agree this.
For other developers, the decisions provide helpful clarity on what is meant by ‘incorporated’ and ‘ordinarily’. In particular, anyone who has been denied VAT recovery on the basis that they were including items that were not standard in most homes should revisit this in the light of the Upper Tribunal’s decision.
As these definitions also affect the treatment of goods provided by building contractors, residential landlords should also check where they have been charged VAT by their lead contractor on items and ensure that this was correct. If there remains any uncertainty, then seeking specialist advice would be beneficial to avoid costly VAT charges.
For any further advice on the above please contact Adam Cutler, Director VAT on 020 7842 7162.
This article first appeared in Bloomberg BNA in March 2018.