US Embassy in VAT row

An expert on the Vienna Conventions says the dispute between the US Embassy and the Treasury over tax has implications for all missions.

The UK Treasury and US government are locked in a dispute over a VAT bill for the construction of the new US embassy.

The Treasury is demanding the US pay VAT, which could run to as much as £50m, for the supply of construction and other building services required to complete the development of the 500,000 sq ft building.

However, the Overseas Building Office bureau, the agency of the State Department in charge of the relocation, is arguing for an exemption because services and construction materials are being used for the purposes of a diplomatic mission.

In the past eight years the bureau has managed the development of 68 diplomatic properties globally and has received tax relief for all sites under diplomatic treaties or reciprocal arrangements.

Should missions qualify for VAT-free building services?
The tax dispute has implications for all diplomatic missions in the UK that are charged VAT when constructing, enlarging or modifying premises for which they own the freehold or leasehold title.

Professor Eileen Denza, former FCO legal adviser and expert on the Vienna Conventions, explained to Embassy it is a question of how the Vienna Conventions are interpreted under local law.

Under an exception of Article 34 of the Conventions, the UK included an amendment which permits it to charge VAT as an indirect tax. In the US (and many other states), sales tax is identified separately and diplomats are exempt from payment.

However, Professor Denza, who has written extensively on tax issues as author of Diplomatic Law and contributor to the latest edition of Satow’s Diplomatic Practice, explained further that Article 23 of the Conventions allows for the exemption of local taxes in respect of the diplomatic mission, except for specific services rendered (such as street lighting).

The question is whether construction services and materials to build a new mission or enlarge an existing one would fall into the same category.

According to Professor Denza: “In the UK the VAT [on construction services] would normally be separately identified and although payable to the supplier, it would be passed on to the Government.

“It may be argued that it does not in reality represent payment for the specific construction services but is simply a tax imposed on the transaction passing into general UK revenue, so that it should fall within the general tax exemption given to foreign governments.”

Tax-free construction schemes
When faced with similar problems in other countries, the US has used reciprocal arrangements, permitted under the Vienna Conventions, to resolve these issues. But such arrangements are not permitted under UK diplomatic law.

However, many states – including the UK – have special schemes which are not based on reciprocity but on persuading foreign governments to buy certain goods locally on a tax-free basis rather than use their customs privileges to import these goods.

In the UK the schemes relate to cars, alcohol and tobacco, and ‘fine furnishings’. The scheme does not currently extend to building materials or services, but Professor Denza claimed it would be possible to do so, provided the scheme was extended on a non-discriminatory basis.

With the increase in the construction of purpose-built embassies globally as well as the relocation and modification of diplomatic missions in the UK, an extension of special schemes would be welcomed by the diplomatic community in the UK.

To read an expanded version of Professor Denza’s legal arguments, please click here.
Satow’s Diplomatic Practice (Sixth Edition) is available for £110 from Oxford University Press ( and academic bookstores.