Land use partial exemption method best for woodlands

In Will Woodland v HMRC [2017] TC06021, the First-Tier Tribunal (FTT) agreed with the partial exemption method used by the charity: based on the way in which the land was used, an area basis.

• WW are a charity whose objectives are to conserve, restore and establish trees, plants and wildlife. Part of the aims include creating new Woodlands and managing them, including the long-term plan to thin the trees, which would generate timber for sale.
• In 2001 WW applied for and HMRC agreed to a special land use Partial exemption (PE) method:
  • Income basis would be inappropriate as timber sales would not take place for some time and the land was also used in part for Residential letting.
• HMRC carried out a review in 2006 and accepted the continued use of that method.
• Following a 2013 review HMRC decided that the land use method was not fair and reasonable:
  • Wooded areas treated as wholly business are not 100% covered by trees. They also include paths, water, grasses etc. which would not be used for the business.
  • The costs of planting and establishing trees cannot be solely for the purposes of future timber sales as they also relate to the main charitable objectives of conservation etc.
  • This meant that the land had dual purpose use and the VAT relating to this land should be considered residual not wholly related to future taxable supplies of timber.
• HMRC also suggested that an income based method which includes an estimate of timber income spread over a number of years to try and ensure there was no distortion, was a more fair and reasonable method.
• HMRC rescinded the PE method agreement, a decision that cannot be appealed, but WW continued to use it having told HMRC they believed it remained fair and reasonable.
• VAT assessments were issued for the periods 10/14 to 03/15 and 04/15 to 03/16, totalling over £75,000, including interest.
• WW appealed these assessments.

The FTT found in favour of WW:

• Dual purpose of woodlands:
  • An economic activity is within the scope of VAT “whatever the purpose or result of that activity”.
  • On this basis, the charitable objectives, being non-business, are irrelevant.
  • The purpose or result of the transaction, i.e. whether it helps achieve charitable non-business objectives, is also irrelevant in determining whether an activity is an economic activity or not.
  • The costs associated with the planting, establishing, and maintenance of woodlands are clearly incurred wholly in respect of future taxable timber sales.
  • There is no dual purpose and the VAT on these costs should not be apportioned.
• As to the residual costs and partial exemption method suggested by HMRC:
  • HMRC’s income based approach was “hopelessly flawed”.
  • It pre-supposed that future timber sales could be established in terms of value and timing, which was proved not to be the case.
  • The income approach suggested by HMRC would not give a fair and reasonable result.
• As to the continued use of the land area basis:
  • Burden of proof that this is a fair and reasonable method is normally on the appellant.
  • This approach was agreed with HMRC in 2001 and following a visit in 2006: this was sufficient evidence that it was a fair and reasonable approach.
  • It was down to HMRC to show there was a superior approach.
  • HMRC’s objection to the land area approach, as per the statement of case, was solely down to the dual purpose of the woodlands.
  • As the FTT found there was no dual purpose it was entirely sensible to allow continued use of the PE method on a land use basis.

The partial exemption method used was fair and reasonable and the assessments were cancelled.

Links

Partial exemption & input VAT

Woodlands

VAT: land and property (notes)

External link Will Woodland v HMRC [2017] TC06021

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