On appeal from: [2021] CSHI 29
This appeal concerns whether the appellant (trading as Moulsdale Properties) should have charged value added tax (“VAT”) on the sale price of a property which he sold to a purchaser who had no connection to him in September 2014.
Sales of land and buildings are generally exempt from VAT in accordance with Schedule 9 Group 1 to the Value Added Tax Act 1994 (“VATA”). However, paragraph 1 of Schedule 10 to VATA gives a taxable person an option to tax transactions relating to a particular parcel of land. Where the option to tax is exercised, VAT must be charged and accounted for to His Majesty’s Revenue and Customs (“HMRC”) whenever there is a sale of that land. Paragraphs 12 to 17 of Schedule 10 to VATA provide for compulsory application of an option to tax in certain circumstances. If the option to tax is applied in accordance with those paragraphs, a sale of property where an option to tax has been exercised goes back to being a sale that is VAT exempt.
In 2001, the appellant bought a building for a purchase price to which VAT was added because the seller had opted to tax the land on which the building was built. The appellant then himself exercised an option to tax that land. This enabled him to claim back from HMRC the input VAT he had paid to the seller. In 2014, the appellant sold the property to a company which was not registered for VAT. When the appellant sold the property, he did not add VAT to the purchase price. The appellant argued he did not charge VAT because Schedule 10 to VATA meant his option to tax was disapplied and so the sale of the property was VAT exempt. HMRC disagreed. HMRC’s position is that the sale was not tax exempt, the appellant should have charged the purchaser VAT and then paid that VAT over to HMRC.
HELD – The Supreme Court unanimously dismisses the appeal.
The statutory provisions:
The legislation which determines whether VAT is chargeable on the sale of land is Schedule 10 to VATA. The case turns on whether the appellant is a “developer” of the land as defined in paragraphs 12 – 17 of that Schedule. Unfortunately, because of the way the provisions are drafted there is a conundrum in the legislation Unfortunately when it comes to deciding whether the appellant is a developer of the land and hence whether the sale of the land is subject to VAT or is exempt from VAT. Under Schedule 10:
- If the appellant did intend or expect the purchaser to pay VAT on the sale price for the building (that price being more than the minimum set of £250,000) then the appellant is a developer of the land. That would mean that paragraph 12(1) of Schedule 10 supplies the option to tax, so that the sale of the land reverts to being an exempt transaction on which the appellant should not charge VAT.
- However, if the appellant did not intend or expect that the purchaser would pay VAT on the price of the building (being more than the minimum of £250,000), then the appellant would not fall within the definition of a “developer of the land” and the option to tax would still apply, making the sale subject to VAT.
The effect of the relevant Schedule 10 provisions is therefore that if the appellant charges VAT then he is a developer of the land and VAT is not payable because the option to tax is disapplied but if the appellant does not charge VAT then he is not a developer of the land and the option to tax still applies to the sale so that he should charge VAT.
The proper construction of paragraphs 12 and 13 of Schedule 10:
The appellant and HMRC acknowledged the circularity problem created by the provisions of Schedule 10 and have proposed different solutions.
The appellant argues for a broad construction of the provisions. He contends that because he has exercised the option to tax in relation to the land, he did intend or expect that the purchaser would pay VAT on the purchase price of the land. On the appellant’s solution, the VAT inquiry should stop here. Accordingly, because the appellant has the relevant expectations, he is a developer of the land, and the sale is therefore exempt, and he is correct not to charge VAT. The appellant argues that to avoid the circularity, one should not go on to consider the disapplication of the option to tax after concluding that the sale is exempt.
However, the Supreme Court holds that the narrow construction put forward by HMRC is the correct construction as it makes as much sense as one can of the legislation. The Supreme Court agreed with HMRC’s solution that for the purposes of these provisions, in order to decide whether the sale should bear VAT or not, the relevant intention or expectation as to whether the purchaser would pay VAT on a capital expense in relation to the building must be an intention or expectation about incurring VAT at some other cost, different from the actual price of the building itself. Thus, HMRC was correct that the appellant should have charged VAT at the sale price.
The Supreme Court holds that Schedule 10 is aimed at ensuring that exempt businesses cannot recover input tax. This purpose would be defeated on the construction the appellant argued for. On his broad construction, the provisions would enable him to have the benefit of the option to tax the land as long as that was favorable to him but enable him to switch off the option to tax simply by selling it if he did not want to have to charge the purchaser VAT on the purchase price.
For the judgment, please see:
For the press summary, please see:
To watch the hearing, please see:
17 January 2023 Morning session Afternoon session