When seeking permission for a project, developers are often asked to make a financial contribution to the local authority or, perhaps more commonly, required to undertake new public infrastructure works, such as constructing schools or civil engineering. Frequently referred to as a planning gain agreement, such orders are made pursuant to overarching planning legislation.
In its current guidance, HMRC confirms a developer’s VAT costs are ‘attributable to their supplies of land and buildings on the development for which the planning permission was given’. Thus, a developer whose development will be taxable can reclaim their VAT costs where, for example, they have constructed a public road as part of their planning condition.
An important tax judgment released last week now provides some useful guidance but may also throw some scenarios into doubt.
Under a licensing condition made by their local municipal authority, German quarry operator Mitteldeutsche Hartstein was required to extend a public road leading to their quarry. Three key questions were put forward to the Court of Justice of the European Union (CJEU):
- Was Mitteldeutsche entitled to reclaim their VAT costs in respect of the road works?
- Was there a non-monetary barter arrangement at hand i.e. works in return for the planning licence?
- Was there a deemed supply charge on Mitteldeutsche for private use?
On the first question, and in line with earlier case law (e.g. Iberdrola) the CJEU concluded that, as Mitteldeutsche would be using the road to access their quarry, the works were a cost component of their taxable supplies – despite the fact the general public also used the road. However, the CJEU explicitly stated such costs must be necessary to carry out a taxable activity, and the costs must be included in the price of the initial transactions carried out by that business.
On the second question, the CJEU decided that there was no non-monetary barter transaction between the developer and the local authority. This will be a relief for UK local authorities who would not want there to be any inference that planning permission is agreed in return for funding or community works.
Lastly, on the third question, the road was not put into private use as it was used for the purpose of Mitteldeutsche’s business, so no deemed supply VAT charge arose.
The judgment provides some comfort for developers where costs relate to infrastructure works which are actually used by that developer, but it does highlight whether VAT is correctly reclaimable against works where the developer doesn’t use the infrastructure itself – for example, constructing a community school.
The old ‘but for’ adage that a developer wouldn’t incur such costs but for the need to gain planning could now be at risk. There must be a more direct and necessary link to an output. Whilst HMRC did not change its policy following Iberdrola, with the recent Mitteldeutsche decision, this could now be subject to change.
Furthermore, and on closer reading of HMRC’s extant policy, there is only specific reference to reclaiming VAT on ‘the development’. This may leave HMRC wiggle room to argue the Mitteldeutsche decision was always their stance. Could retrospective action also be on the cards?