Residual VAT recovery on construction services

The Glasgow School of Art – UT decision

The dispute concerns input tax on the construction works at the taxpayer’s Garnethill campus. The project was the demolition of two buildings and partial demolition of and refurbishment of another, with the construction of a new building (used for education purposes) on the site of the demolished ones. The new building would be wrapped around and above the refurbished building. The refurbished building was the Student Union.

The taxpayer had recovered input VAT in full on the basis the VAT incurred only related to taxable supplies (rent of the opted refurbished building, which it said was a separate building from the new one, to the Student Union). HMRC assessed on the basis that the input tax was mixed use and should be recovered in line with the taxpayer’s business / non-business recovery rate.

The earlier FTT concluded that there was a single supply of all the work carried out on the site and that the ultimate result was a single building. However, even if there was a separate supply of the works to the building that was let to the Student Union, the FTT concluded that this letting was not an economic activity. Whilst noting that a low level of rent is not an automatic bar to deduction, the FTT considered the lease was not an economic activity. The FTT added it would take the taxpayer more than 500 years to recoup its capital outlay and that is not allowing for the fact that it incurs the insurance and some other costs. The taxpayer appealed to the UT.

The UT began by agreeing with the FTT that the question as to whether there were two separate buildings is of no real importance. The UT saw no reason to interfere with the FTT’s conclusion that there was a single building. Turning to the two separate supplies point, the UT considered that the FTT applied the correct legal test and agreed with the conclusion that there was a single supply. The UT noted that whilst the taxpayer wanted and obtained two separate premises with different functions, this does not mean it received two supplies. The original invoicing arrangement appeared to reflect the economic and commercial reality of a single supply. These were only amended and separated after the VAT issued had been identified. For these reasons the UT noted that the taxpayer’s appeal must fail. For completeness, the UT went on to consider whether the taxpayer was making taxable supplies to the Union. Again the UT agreed with the FTT that there were no taxable supplies being made, as the letting to the Union was not an economic activity, so even if there had been a separate supply of services in relation to the work done on the let Assembly building the VAT on that separate supply would not have been recoverable.


This is a useful reminder in relation to the concept of single versus multiple supply, as well as the meaning of economic activity. Just because there were two premises that does not infer the taxpayer received separate supplies in respect of each. Economic activity is a complex area, as generally any charge by a taxable person, where there is a contract and reciprocity, is brought within the scope of VAT, unless the charge to each customer is individually calculated and based on the customer’s means and ability to pay rather than the value provided, but here the charge was just too low by comparison to the costs, to represent any sort of return on the asset.