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Nominal rent is not a business activity.

Glasgow School of Art (GSA) incurred VAT on a major refurbishment project and sought to reclaim this VAT by exercising its option to tax and charging an annual rent of £5k per annum to the students union for the use of the premises, which was some way below market value. 

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GSA also sought to argue there were two buildings rather than one and that the construction costs be attributed to each building, with full deduction for the opted building, having initially treated the input tax as residual. The First Tier Tribunal refused GSA’s appeal.

On appeal to the Upper Tribunal, the court found that whilst there was a supply in return for consideration applying principles established in Wakefield College, the rental did not constitute a business activity. The test for economic activity is whether a supply was made for “remuneration” i.e. for obtaining income on a continuing basis. The UT took the view that the renting of the building was primarily to facilitate GSA’s support for a student union, not to provide it with income from exploiting the property.

The FTT had found based on the facts that there was a single building and the UT said this finding should not be disturbed. In any event, the economic reality was that there was a single contract for the development of the whole site. A split of the services between the two buildings would be artificial. GSA’s attempt to retrospectively request separate invoices from the supplier did not allow for VAT recovery.

The decision highlights the importance of careful planning from the outset, and in particular ensuring that contracts and invoices reflect the economic and commercial reality of what is being supplied. 

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