Moulsdale (t/a Moulsdale Properties)
| Jurisdiction | UK Non-devolved |
| Judgment Date | 15 June 2018 |
| Neutral Citation | [2018] UKFTT 309 (TC) |
| Date | 15 June 2018 |
| Court | First Tier Tribunal (Tax Chamber) |
[2018] UKFTT 0309 (TC)
Judge Anne Scott, Member: Peter Sheppard
Philip Simpson, QC, appeared for the appellant
Elisabeth Roxburgh, Advocate, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Option to tax land under VATA 1994, Sch. 10, Pt. 1 – Whether disapplication provisions in Sch. 10, para. 12 to 17 applied on basis that land was exempt land – Circularity of statutory provisions – Both anti-avoidance and genuine transactions caught – Whether there was the necessary intention or expectation in respect of relevant transferee – No – Taxpayer's appeal dismissed.
The First-tier Tribunal (FTT) dismissed the appeal against HMRC's decision that an option to tax was not disapplied, so standard-rating applied to the sale of a property.
On or about 3 May 2001, Moulsdale purchased 5 Deerdykes Road (the “Property”). The vendor had opted to tax the Property. Moulsdale did not opt to tax the Property before the purchase. The purchase price of the Property excluding VAT was £1,140,000. The VAT return that included the purchase was for period 06/01. Moulsdale received a VAT repayment of £195,455 pursuant to submitting the VAT return. On or about 9 May 2001, Moulsdale opted to tax the Property.
On or about 11 September 2001, Moulsdale leased the Property to Optical Express (Westfield) Ltd (“OEWL”). OEWL's occupation of the Property was not wholly, or substantially wholly, for eligible purposes. OEWL was connected with Moulsdale for the purposes of VATA 1994, Sch. 10. Throughout the period to 2007, Moulsdale continued to account for output tax on the lease of the Property to OEWL. In 2007, Moulsdale became aware that the grant of the lease and subsequent supplies under it could be exempt.
HMRC advised Moulsdale that he was entitled to revisit the last three years, so he sought repayment of output tax charged to OEWL for the period which was not time barred under the three-year cap. On or around 2 September 2014, Moulsdale sold the Property to Cumbernauld SPV Ltd (“CSPV”). The Property was sold subject to the lease in favour of OEWL. The price was £1,149,374. CSPV was not connected with Moulsdale for the purposes of Sch. 10. CSPV did not advise HMRC of an option to tax the Property before purchasing it. CSPV was not VAT registered at that time, nor did it subsequently become VAT registered.
There is some circularity in interpreting Sch. 10 where a taxpayer wishes to sell an opted building, or land, but at the time of sale the building or land is not a capital item under the Capital Goods Scheme (“CGS”) for the seller (as over ten years had elapsed since purchase). However, if the sale price exceeds £250,000 and the sale is subject to VAT because of the option to tax, it could become a capital item in the hands of the purchaser. If the “exempt land test” is met, the seller's option to tax is potentially disapplied, i.e. rendering the supply exempt, rather than standard-rated. However, that can result in circularity since, if the supply is no longer taxable, a capital item in the CGS would not be created and therefore the supply then becomes standard-rated.
HMRC argued that, to avoid such circularity, the CGS item created by the transfer (and under the grant subject to the anti-avoidance test) is ignored for the purposes of deciding whether the grantor's option is disapplied. Thus, the sale of the property is standard-rated (para. 19 of the decision).
Although the property had been a capital item in the hands of Moulsdale, it was no longer a capital item due to the expiry of ten years. Thus, the only possibility of qualification would be if it were to be a capital item in the hands of the purchaser.
Moulsdale could only be a “developer” within Sch. 10, para. 12(1) if para. 13(2) applied. The question was whether the land is, or was intended or expected to be, a relevant capital item. Paragraph 13(3) was not engaged because the property was no longer a capital item for Moulsdale.
The property was not transferred as part of a transfer of a business, or part of a business, as a going concern. It was transferred in the course of a supply, so the purchaser was the relevant transferee.
Under para. 13(4), the issue was whether Moulsdale could have intended, or expected, that the Property would become a capital item in the purchaser's hands. The FTT held that it is a subjective test, as to what would be a genuine or real, not a hypothetical, intention or expectation as at the time of the grant (para. 33 of the decision).
Having opted to tax, the supply bears tax unless the option is disapplied, e.g. under Sch. 10, para. 12(1)(b) the supply is not taxable if the “exempt land test” is met. The property was occupied by a relevant person, which was OEWL and which was connected with Moulsdale, but not the purchaser. OEWL's occupation of the building fell within Sch. 10, para. 15(2) and so the land was exempt land.
The FTT held that at the date of the grant Moulsdale knew that the supply would not be, and could not be, taxable. Knowing that no other relevant expenditure was likely, Moulsdale could not have intended or expected that the property would become a capital item in the hands of the purchaser (para. 43 of the decision). Thus, HMRC's decision was upheld and standard-rating applied to the supply.
This case highlights the complex provisions on opting to tax property for VAT purposes. If a person opts to tax, then the expectation or assumption is that any supply by that person in respect of that property is standard-rated, unless it is within a specified exemption. The provisions at issue are described as anti-avoidance, but can apply to non-tax avoidance arrangements. This decision clarifies the possible circular interpretation of the law where the seller has owned the property for over ten years, so it is no longer within the capital goods scheme, but as the sale price is over £250,000 the property could be caught by that scheme as regards the purchaser.
[1] The disputed decision of the respondents (“HMRC”) is a decision dated 16 March 2017 that the sale by the appellant of the property at 5 Deerdykes Road, Cumbernauld (“the property”) was a taxable supply for the purpose of Value Added Tax (“VAT”) as the requirements of paragraph 12 of Schedule 10 to the VAT Act 1994 (“VATA”) were not met. In other words the election to waive exemption (hereafter the option to tax) made by the appellant in respect of the property was not disapplied and the property was not exempt from VAT.
[2] At the outset of the hearing the parties agreed that there was no dispute in relation to the relevant facts and lodged a Statement of Agreed Facts in the following terms (paragraph 3 is as amended in the course of the hearing):–
1. On or about 3 May 2001 the Appellant purchased a property at 5 Deerdykes Road, Westfield, Cumbernauld (the “Property”). The vendor had opted to tax the Property. The Appellant did not opt to tax the Property prior to the purchase. The purchase price of the Property excluding VAT was £1,140,000. VAT was £199,500. The VAT Return that included the purchase is that for period (06/01). The Appellant received a VAT repayment of £195,455.22 pursuant to the completed VAT Return.
2. The Appellant subsequently opted to tax the Property on or about 9 May 2001.
3. On or about 11 September 2001 the Appellant leased the Property to Optical Express (Westfield) Limited (“OEWL”). At all material times, OEWL's occupation of the property has not been wholly, or substantially wholly, for eligible purposes.
4. OEWL was a person connected with the Appellant for the purposes of Schedule 10 of VATA 1994 at all material times.
5. Throughout the period to 2007, the Appellant continued to account for output tax on the lease of the Property to OEWL. In 2007 following a VAT visit the Appellant became aware that the grant of the lease and subsequent supplies under it should be treated as exempt supplies by virtue of Schedule 10 of VATA. The Respondent advised the Appellant that the Appellant was entitled to revisit the last three years and the Appellant sought repayment of output tax charged to OEWL for the period which was not time barred under the three year capping restrictions. On or around 2 September 2014 the Appellant sold the Property to Cumbernauld SPV Limited (“CSPV”). The Property was sold subject to the lease in favour of OEWL. The price was £1,149,374.
6. CSPV is not a person connected with the Appellant for the purposes of Schedule 10 of VATA. CSPV did not advise HMRC of an election to waive exemption on the Property prior to purchasing the Property. CSPV was not VAT registered at that time nor has it subsequently become VAT registered.
[3] Although the correspondence, Notice of Appeal and Statement of Case, and indeed the skeleton arguments, canvassed a number of disparate issues, the parties agreed that the sole issue for determination by the Tribunal was the interpretation of the relevant provisions of Schedule 10 VATA because of the admitted circularity caused thereby.
[4] In summary, the circularity can arise where a taxpayer wishes to sell an opted building, or land, but at the point of sale the building or land is not a capital item in the Capital Goods Scheme (“CGS”) for the seller. However, if the sale price exceeds £250,000 and is subject to VAT because of the option to tax, it has the potential to become a capital item in the hands of the purchaser and that is relevant in terms of the legislation. In circumstances such as where the “exempt land test” (see below) is met the seller's option to tax is potentially disapplied rendering the supply exempt. However, that can result in circularity since, if the supply is no longer taxable, for the reasons set out below, a capital item in the CGS would not be created and therefore the...
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