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HMRC internal manual

VAT Land and Property

HM Revenue & Customs
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Taxable Person: joint ventures


The basic principles of this subject area are outlined in VTAXPER and this paragraph will confine itself to the land and property considerations.

One particular area that has posed frequent problems is where two or more parties come together to refurbish a property with an intention to sell it. In such cases, the key point to establish is whether the parties are genuinely involved in a ‘joint’ venture, or whether, in actual fact, one venturer is simply providing services to another.

The terms ‘joint venture’ and ‘consortium’ are not defined in law. There are, however, a number of characteristics that we would consider to be indicative of this type of association:

  • the venturers agree to act in unison;
  • they fulfil agreed obligations and contribute resources, which are later correspondingly reflected in the level of benefit which they receive when the profits of the venture are shared;
  • although the profits may not be shared equally, the co-venturers are equal in the sense that no one venturer has control over another.

The advantage to the parties in claiming that their arrangement is a joint venture is that they could then treat their “share of profits” arising from the exempt sale of the refurbished property as outside the scope of VAT by virtue of the joint venture. In contrast, where only one party owns the property and a supply of services is provided by the refurbishing or developing company to the property owner, those services will be standard rated and thus create sticking tax for the property owner making an exempt supply of the property.

You will need to examine the contracts between the parties to establish who is doing what, and for whom.

The treatment of joint ventures engaged in property development has been considered in a number of Tribunal cases. In each of the cases described below, the Tribunal’s decision turned on the key issue of who held the interest in land; a partnership cannot exist where the property in question is owned by only one of the parties.

Strathearn Gordon Associates Ltd (VTD 1884)

In Strathearn Gordon Associates Ltd (VTD 1884) the appeal concerned a company who entered into a number of property development ventures with overseas companies. In all of these, Strathearn supervised the development and provided the management skills, whilst the other venturer provided the funding. Strathearn charged the overseas venturer a management fee, based upon a percentage of the profits of the venture.

The Commissioners ruled that the fees were consideration for a supply of services, but the Appellant contended these fees represented an outside-the-scope profit share.

In dismissing the appeal the Tribunal concluded that two parties could not enter into an agreement to carry on business together when the property in question remained at all times the property of only one of them:

‘In our judgement the mere fact that remuneration for services rendered was measured by the share in profits does not convert into the partnership agreements which are in their essence agreements for the supply of services.’

The ‘profit share’ was thus actually consideration for the service of supervising the modernising, repair and decoration of the property.

Keydon Estates (VTD 4471)

In Keydon Estates (VTD 4471), the appellant negotiated the purchase of a plot of land on behalf of London and Overseas Land PLC (LOL). It also obtained planning permission and arranged with the sitting tenants for vacant possession. LOL later paid the sum of £125,000 to Keydon Estates.

The Commissioners ruled that the sum received was consideration for services supplied to LOL and was taxable at the standard rate, but the Appellant contended that this sum represented the share of profits paid under a partnership.

The Tribunal concluded in dismissing the appeal that a partnership did not exist and that Keydon had supplied services to the other company in return for an expected share in the profits of the venture:

‘It is evident that the Appellant Company had no legal or equitable interest in the land and that the decision to sell the land was entirely that of LOL.’

Fivegrange Ltd (VTD 5338)

In Fivegrange Ltd (VTD 5338), the appellant identified a property which was suitable for redevelopment. It did not purchase the property, but negotiated with another company Crofthaven Properties (CP), who were able to provide the necessary finance.

Two agreements were entered into by the companies.

The first agreement stipulated that Fivegrange would act as a property consultant to CP. A set annual fee, subject to VAT, was payable for these services.

The second agreement referred to the joint venture aspect. It stated that the two companies were engaged in a ‘joint venture’ by way of redeveloping the property. However the joint venture would be in the name of Crofthaven and controlled by the board of directors of Crofthaven, which was able to put together the funds for the venture. The agreement was at great pains to stress that no other partnership existed, and that the venturers could not sue each other for negligence. The net profits were to be divided between the two companies, 95 per cent to Crofthaven and 5 per cent to Fivegrange.

VAT was not declared on the 5 per cent to Fivegrange. The Commissioners asserted that the money was consideration for the supply of services to Crofthaven and taxable at the standard rate, but the Appellants contended that this money was the share of profits from a joint venture and outside the scope of UK VAT.

In dismissing the appeal the tribunal concluded:

‘The agreement under which Fivegrange Ltd was to be paid 5 per cent of the profits of the Leicester Square project expressly stated in paragraph 8 that Fivegrange Ltd was not to be a partner of Crofthaven. That this was the intention of the parties seems to me to be confirmed by the fact that Fivegrange Ltd was at no risk if the result of the project was that a loss was made. Equally it was clear that Crofthaven paid for and owned the property, and Fivegrange was not a joint owner. The joint venture was to be carried on through and in the name of Crofthaven and to be managed and controlled through the medium of the board of directors of Crofthaven. Crofthaven was, therefore, to be solely responsible for the management and control of the project. In these circumstances it does not seem to be possible to say that the relationship of a partnership subsisted between the two companies.’

The Fivegrange case is interesting in that the contract was divided into two parts, with the profit share element being separated from that which provides for the supply of management consultancy services. However, this did not influence the decision of the Tribunal, and together with the other cases mentioned above, this forms a body of cases which have upheld our line that a partnership cannot exist where only one party owns the property in question.

If you decide that one venturer is in a dominant and controlling position over the others, supplies are made:

  • by the controlling venturer to outside bodies, and
  • within the venture, from one venturer to another.

We will register joint ventures as partnerships for VAT purposes, as long as they meet the necessary criteria. Full guidance is contained within VATREG Registration.

In this connection, confusion frequently occurs when the parties, who satisfy the partnership criteria, also continue to trade as separate legal entities. It has been known for traders who act in this dual capacity to confuse the borderlines between one legal entity and the other.

However, it is perfectly feasible for a company in its own right (eg builders) to supply services to a partnership in which it is a partner and joint owner in a property. In this situation it is essential when examining accounts, contracts and invoices, to keep clearly in mind exactly which entity is doing what, and for whom.

Latchmere Properties Ltd (Ch D [2005] STC 731)

The importance of the contractual position between the parties was demonstrated in the case of Latchmere Properties Ltd (Ch D [2005] STC 731). The case concerned some properties that the owner (B) wished to redevelop and sell. To that end they entered into a development contract with company (L), who under the contract were to carry out the work required (including unit sales) and in return receive part of the sale proceeds. The High Court upheld the decision by the tribunal and found that the arrangement amounted to a joint project between the parties to which each made its separate contribution. It followed that (L) had not made a supply of construction services to (B). Of significance is that it also concluded that the overall effect of the agreement between the parties was that (L) had acquired an equitable interest in the properties.