HM Revenue and Customs Brief 33/09
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Issued 8th June 2009
VAT: Clarification of HMRC's policy following the House of
Lords judgment in Newnham College
This Revenue and Customs Brief announces HM Revenue and
Customs' (HMRC) revised interpretation of the law following the
judgment of the House of Lords in the case of The Principal and Fellows
of Newnham College in the University of Cambridge  UKHL 23. It
also provides guidance for those businesses affected by the judgment.
The case before the House of Lords concerned whether Newnham
was 'in occupation' of the college library. If they were, their option
to tax the library would be disapplied and their occupation would be
for the purpose of making supplies of exempt education. Consequently,
the VAT incurred on the rebuilding and refurbishment of the library
would be irrecoverable. The House of Lords upheld the judgment of the
Court of Appeal and found in Newnham's favour. They concluded that
Newnham was not in occupation and, as a result, that their option to
tax was not disapplied.
HMRC's revised interpretation of law
HMRC now accept that physical presence alone is not the
correct test of occupation for the purposes of what is now VATA 1994
Schedule 10 Paragraphs 12 to 17 (the 'anti-avoidance test'). Following
the House of Lords judgment, a person is considered to be 'in
occupation' if, in addition to physical presence which occupation
normally entails, they have the right to occupy the property as if they
are the owner and to exclude others from enjoyment of such a right.
This means a person must have actual possession of the land along with
a degree of permanence and control. Such a right will normally result
from the grant of a legal interest or licence to occupy. Occupation
could also, however, be by agreement or de facto and it is therefore
necessary to take account of the day to day arrangements, particularly
where these differ from the contractual terms. An exclusive right of
occupation is not a requirement; an agreement might, for example, allow
for joint occupation. Equally, it is not necessary for a person to be
utilising all of the land for all of the time for them to be considered
as occupying it.
A person whose interest in land is subject to an inferior
interest, such as to prevent him from having rights of occupation for
the time being, is not 'in occupation' for the purposes of the
anti-avoidance test until the inferior interest expires. It should be
noted, however, that an important feature of the test is that it is
forward looking and takes account of the intended or expected
occupation of the building at any time during the Capital Goods Scheme
(CGS) adjustment period. As a result, a person who has granted an
inferior interest but intends during that adjustment period to occupy
the land himself would intend to be 'in occupation' for the purposes of
the anti-avoidance test and so must consider whether his intended
occupation was for eligible purposes.
However, a person can ignore the following types of
occupation for the purposes of the test:
- 1. Occupation which is purely for the purpose of making
his rental supplies under the grant, since those are the very supplies
whose liability he is trying to determine by applying the test. For
- (a) occupation by the grantor between the date of the
grant and the start of occupation by the tenant which is for the
purpose of undertaking refurbishment or repairs,
- (b) occupation by maintenance, security or reception staff
(or similar), unless it is for the purpose of providing ongoing
services separate from the letting itself.
- 2. Occupation at a future date, but within the CGS
adjustment period, which is solely for the purpose of re-letting the
property or making a fresh grant.
Businesses that were wrongly denied input tax recovery may
submit claims to their local Business Advice Centre. These will be
subject to a three-year limitation period (four years from 1 April
2009, subject to a transitional period). All such adjustments or claims
must take account of any underdeclared output tax as a result of
incorrectly treating the option to tax as disapplied.
Further information about claims can be found in Notice 700/45
'How to correct VAT errors or make adjustments or claims'.
About the Author
© Crown Copyright 2009.
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Article Published/Sorted/Amended on Scopulus 2009-06-11 14:14:37 in Tax Articles