The case concerned a Bulgarian developer which was building a holiday village and needed to connect the site to municipal infrastructure which was not fit for purpose. As part of the planning agreement, the developer agreed to repair and upgrade a waste pump station for the local authority.

Having done so and recovered the VAT the developer posted the costs to its accounts as a cost of its trade. However, the local court denied VAT recovery on the basis that it was not the developer’s input tax on the basis that the VAT was not incurred by the developer for its business purpose. The case was referred to the CJEU [Direktor na Direktsia ‘Obzhalvane i danachno-osiguritelna praktika’ — Sofia V Iberdrola Inmobiliaria Real Estate Investments’ EOOD Case C 132/16].

The advocate general argued that the only party which would receive the supply from the contractor was the local authority, as the work was carried out on its facility. It was accepted that there was some benefit to the developer in incurring the costs but, ultimately, the VAT incurred on the costs was not recoverable as the supply was to the local authority and not the developer. The advocate general also commented that the accounting treatment was irrelevant for the purposes of deciding who received the supply.  

The opinion stated: ‘Article 26(1)(b), Article 168(a) and Article 176 of the VAT Directive are to be interpreted to the effect that they do not permit the deduction of input tax for services which are supplied free of charge directly to a third party for its own purposes, even if they are motivated by business reasons.

‘This holds irrespective of the manner of entry in the accounts under national law chosen by the taxable person.’ 

Saffery Champness says the decision has a potential impact on planning gain agreements in the UK (often referred to as section 106 or section 75 agreements).

At the moment, HMRC accepts that VAT incurred by a developer on works required under a planning gain agreement can be recovered, where the services are carried out on land owned by a local, or other, authority, but the court’s opinion has cast doubt on this treatment. 

If the EU court follows the advocate general opinion, then there could be more of an issue where works are carried out on land owned by a third party as there could be a VAT cost to the third party, as it may not be in a position to recover the VAT.

In its analysis Saffrey Champness said: ‘We expect that the court will hand down its judgement in the autumn. If it does follow the advocate general’s opinion, then it may be wise for any UK developers to review agreements being entered into under section 106 or section 75, to consider whether the case is relevant.

‘Though the UK is in the process of exiting the EU, we understand that EU VAT law will become UK VAT law post-Brexit, at least initially. This means that CJEU judgements prior to the date the UK leaves the EU are still relevant and, according to the UK government, will be given the same status as Supreme Court decisions. 

‘The fact that the advocate general’s opinion in the recent Bulgarian case would be at odds with the UK’s current treatment does complicate matters and it may be that HMRC continues to apply its current guidance regardless.  However, this is something that developers and housebuilders should be considering, as VAT recovered on costs incurred in respect of planning gain agreements can be significant.’

Direktor na Direktsia ‘Obzhalvane i danachno-osiguritelna praktika’ — Sofia V  Iberdrola Inmobiliaria Real Estate Investments’ EOOD Case C 132/16 is here.