Property developers are familiar with the requirement to pay for local infrastructure improvements to support their development. These requirements are conditional for planning consent, and it is obvious that without such improvements the development could not deliver the benefit to the local area that the developer must provide so as to ‘sell’ its development in a sustainable manner.
Developers are also aware that, because of the above, HMRC’s policy, set out in section 8 of Notice 742, is that there is no ‘supply’ to the local authority of these improvements, and the VAT incurred on them is deemed to be recoverable in line with general recovery on the direct project costs. We have lived with this approach for decades.
But Advocate General Kokott does not agree with this, and provides her opinion to the CJEU, in Iberdrola Inmobiliaria Real Estate Investments (Case C-132/16), that the costs of a Bulgarian developer, in increasing the capacity of a water purification plant which its development (and other developments) would use, were not sufficiently closely related to its supplies from the development to be its input tax. That will come as a jolt to HMRC and UK developers.
Her rationale is that a mere ‘cause’ of a cost does not create a sufficient relationship to allow recovery. There must be a genuine ‘allocation’. In this case, she sees the purification plant costs as merely being ‘caused’ by the development, and not being ‘allocated’ to it. This is because the costs do not enhance the developer’s asset, but relate to the asset of another party. The ‘user’ of the costs is the municipality that owns the plant, and thus the developer cannot use the costs such as to allocate them to the supplies from the development.
It is worth stopping there for a moment to consider the economic impact of this view. My first point would be that local authorities can reclaim VAT on such costs, so to deny input tax recovery to the developer creates a tax cost that otherwise would not arise. So, there is no tax policy rationale for such an interpretation. Second, it seems obvious that without such infrastructure improvements, the developer’s product would be unsaleable. The developer is only capable of completing part of its product, namely the buildings. But without the amenities these buildings cannot function. It follows that the product is effectively incomplete without these costs being met by the developer.
However, Kokott takes her argument a step further when stating that the lack of a direct and immediate link between the costs and sales from the development might be rectified if one looks at the economic reality of the agreement between the developer and the municipality, which is that there is (perhaps) a barter of the benefit of the infrastructure works in return for the planning permission. This, she suggests, arguably creates a taxable supply from the developer to the local authority, which is sufficient to allow the developer to ‘use’ the costs. This hypothesis, too, would be a surprise to HMRC, whose policy states that there is no supply to the local authority. It would also be a surprise to find that planning consents are effectively sold (by reference to barter) by the planning authorities. I would be inclined to think that there is no sale of the rights in any open market. The conditions are imposed on the development, not on the developer per se. It is the development (irrespective of its developer) that calls for the infrastructure works to be performed. That does not seem to connote a ‘supply’.
So, for various reasons, I do not agree with AG Kokott. I also note that she menacingly states that the CJEU needs to clarify its decision in Sveda (Case C-126/14), and hints in her expressed points of view that Sveda’s application should be limited in its scope (such as by her own arguments about ‘use’ versus ‘causation’). I cannot recall when I last read an advocate general telling the CJEU to improve its explanation of its decisions. Our Upper Tribunal recently did precisely that, when making a reference to the court, but to find the court’s own advocate general doing so is surprising.
If the court does accept her analysis, HMRC will have to consider whether Brexit means ignoring it, or that some policy changes will be needed. I personally think the court will reject it, however.
Property developers are familiar with the requirement to pay for local infrastructure improvements to support their development. These requirements are conditional for planning consent, and it is obvious that without such improvements the development could not deliver the benefit to the local area that the developer must provide so as to ‘sell’ its development in a sustainable manner.
Developers are also aware that, because of the above, HMRC’s policy, set out in section 8 of Notice 742, is that there is no ‘supply’ to the local authority of these improvements, and the VAT incurred on them is deemed to be recoverable in line with general recovery on the direct project costs. We have lived with this approach for decades.
But Advocate General Kokott does not agree with this, and provides her opinion to the CJEU, in Iberdrola Inmobiliaria Real Estate Investments (Case C-132/16), that the costs of a Bulgarian developer, in increasing the capacity of a water purification plant which its development (and other developments) would use, were not sufficiently closely related to its supplies from the development to be its input tax. That will come as a jolt to HMRC and UK developers.
Her rationale is that a mere ‘cause’ of a cost does not create a sufficient relationship to allow recovery. There must be a genuine ‘allocation’. In this case, she sees the purification plant costs as merely being ‘caused’ by the development, and not being ‘allocated’ to it. This is because the costs do not enhance the developer’s asset, but relate to the asset of another party. The ‘user’ of the costs is the municipality that owns the plant, and thus the developer cannot use the costs such as to allocate them to the supplies from the development.
It is worth stopping there for a moment to consider the economic impact of this view. My first point would be that local authorities can reclaim VAT on such costs, so to deny input tax recovery to the developer creates a tax cost that otherwise would not arise. So, there is no tax policy rationale for such an interpretation. Second, it seems obvious that without such infrastructure improvements, the developer’s product would be unsaleable. The developer is only capable of completing part of its product, namely the buildings. But without the amenities these buildings cannot function. It follows that the product is effectively incomplete without these costs being met by the developer.
However, Kokott takes her argument a step further when stating that the lack of a direct and immediate link between the costs and sales from the development might be rectified if one looks at the economic reality of the agreement between the developer and the municipality, which is that there is (perhaps) a barter of the benefit of the infrastructure works in return for the planning permission. This, she suggests, arguably creates a taxable supply from the developer to the local authority, which is sufficient to allow the developer to ‘use’ the costs. This hypothesis, too, would be a surprise to HMRC, whose policy states that there is no supply to the local authority. It would also be a surprise to find that planning consents are effectively sold (by reference to barter) by the planning authorities. I would be inclined to think that there is no sale of the rights in any open market. The conditions are imposed on the development, not on the developer per se. It is the development (irrespective of its developer) that calls for the infrastructure works to be performed. That does not seem to connote a ‘supply’.
So, for various reasons, I do not agree with AG Kokott. I also note that she menacingly states that the CJEU needs to clarify its decision in Sveda (Case C-126/14), and hints in her expressed points of view that Sveda’s application should be limited in its scope (such as by her own arguments about ‘use’ versus ‘causation’). I cannot recall when I last read an advocate general telling the CJEU to improve its explanation of its decisions. Our Upper Tribunal recently did precisely that, when making a reference to the court, but to find the court’s own advocate general doing so is surprising.
If the court does accept her analysis, HMRC will have to consider whether Brexit means ignoring it, or that some policy changes will be needed. I personally think the court will reject it, however.
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