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HMRC have revised their interpretation of VAT law following the House of Lords judgment in The Principal and Fellows of Newnham College in the University of Cambridge v CRC [2008] STC 1225.
Revenue and Customs Brief 33/09 gives details of this and also provides guidance.
The issue in the Newnham case was whether the college was 'in occupation' of the college library.
The House of Lords concluded that it was not in occupation and, as a result, that the college’s option to tax was not disapplied.
HMRC now accept that physical presence alone is not the correct test of occupation for the purposes of what is now VATA 1994, Sch 10 paras 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, he has the right to occupy the property as if he is the owner and to exclude others from enjoyment of such a right.
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 using all of the land for all of the time for him 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 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, HMRC say the following types of occupation can be ignored for the purposes of the test:
- Occupation which is purely for the purpose of making rental supplies under the grant, e.g.:
(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.
- Occupation at a future date, but within the capital goods scheme adjustment period, which is solely for the purpose of re-letting the property or making a fresh grant.
HMRC invite businesses that were wrongly denied input tax recovery to submit claims to their local business advice centre.
