Moulsdale (t/a Moulsdale Properties) v R & C Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 12 March 2020 |
| Neutral Citation | [2019] UKUT 72 (TCC) |
| Date | 12 March 2020 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2019] UKUT 72 (TCC)
Lord Ericht, Judge Dean
Philip Simpson QC, appeared for the appellant (David Moulsdale t/a Moulsdale Properties)
Mr David Thomson QC and Ms Elisabeth Roxburgh, Advocate, instructed by the Office of the Advocate General for Scotland, appeared for the respondent (HMRC)
Value added tax – Option to tax under VATA 1994, Pt. 1, Sch, 10 – Whether disapplication provisions in para. 12 to 17 applied on the basis that land was exempt land – Circularity of statutory provisions – Anti-avoidance – intention or expectation of relevant transferee – Appeal dismissed.
The Upper Tribunal dismissed an appeal against an FTT decision that a property sale by the appellant had been incorrectly treated as exempt. The appellant had considered that an option to tax exercised over the property was disapplied under the “anti avoidance” legislation contained in Sch. 10 of VATA. However, the FTT and then the UT disagreed holding that the option to tax was not disapplied in this case.
Moulsdale purchased a commercial property in 2001 for more than £250k + VAT and opted to tax it. The property was let to a connected party (OEWL) which made exempt supplies. The was subject to the capital goods scheme and, therefore, under the “anti avoidance” legislation contained in Sch. 10 of VATA, Moulsdale's option to tax was disapplied and the lease payments from the connected party were exempt from VAT.
Although the relevant provisions in Sch. 10 are described as “anti avoidance” legislation, the UT was clear that they can apply to normal commercial transactions and no avoidance motive on the appellants' part was inferred.
In 2014 Moulsdale sold the property for >£1m, with the benefit of the lease to OEWL, to a third party, CSPV. CSPV is not registered for VAT and did not opt to tax the property. Moulsdale did not charge VAT on the grounds that his option to tax had been disapplied.
HMRC disagreed and considered that, in respect of the sale to CSPV the option to tax was not disapplied.
The relevant legislation can be found in paras. 12 and 13 of Sch. 10. As described by the FTT (quoted by the UT at para. 7), the legislation gave a circular result (Note – it was agreed that the land was “exempt land”):
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” … 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 supply then becomes taxable.
The UT agreed that the issue before the FTT was whether or not Moulsdale intended that the land would become a capital item in CSPV's hands (para. 36). If the land was a capital item in CSPV's hands then the effect of Sch. 10 was that Moulsdale's option to tax was disapplied (and the property sale was exempt). If the land was not a capital item in CSPV's hands then Moulsdale's option to tax was not disapplied (and the property sale was taxable).
The UT agreed with the FTT that, because Moulsdale expected that the sale would be exempt, it did not intend or expect that a the building would be a capital item for CSPV (para. 39 and 40). As a result Moulsdale's option to tax was not in fact disapplied and the sale was therefore taxable.
Moulsdale's appeal was dismissed.
The legislation contained in Sch. 10 of VATA which sets out the option to tax and when it does, or does not apply, is extremely complex. The decisions of both the FTT and the UT in this case demonstrate how difficult it is to apply the legislation correctly in circumstances such as these where the test gives a circular result. Given the complexity of the issues involved, taxpayers facing similar scenarios should consider reading both decisions closely before proceeding.
[1] The appeal before the F-tT concerned the Respondents' decision dated 16 March 2017 that the sale of the property at 5 Deerdykes Road, Cumbernauld (“the property”) was a taxable supply for the purpose of VAT as the requirements of paragraph 12 of Schedule 10 to VATA 1994 were not met with the result that 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] The Appellant appealed against the decision to the F-tT, which dismissed the appeal. The F-tT considered that, in applying the terms of regulation 113(1) of the VAT Regulations, the Appellant could not have intended or expected that the property would become a capital item in the hands of the purchaser and the disapplication provisions were not engaged. The Appellant now appeals to the Upper Tribunal against the F-tT's decision.
[3] The issue in the present appeal is whether an option to tax made by the Appellant in respect of a property is disapplied by the provisions in Schedule 10 VATA 1994 so that the supply of the property by the Appellant is exempt from VAT.
[4] The appeal proceeded on the following Statement of Agreed Facts:
- 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 20 Return.
- The Appellant subsequently opted to tax the Property on or about 9 May 2001.
- 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.
- OEWL was a person connected with the Appellant for the purposes of Schedule 10 of VATA 1994 at all material times.
- 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. 35
- 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.
[5] Grants of land generally give rise to exempt supplies for VAT purposes, under Group 1 of Schedule 9 VATA. Part 1 of Schedule 10 VATA provides for a person to “opt to tax” any land. Where an option is exercised effectively, grants made in relation to the land at a time when the option has effect do not fall within Group 1 of Schedule 9 VATA and therefore give rise to taxable supplies.
[6] Although there are no authorities addressing the specific issue in this appeal, the parties cited a number of cases of relevance. PGPH Ltd [2017] TC 06189 (at [ 6]–[9]) provides a clear explanation of the relevant provisions as follows:
The option to tax provisions reflect article 137 of Directive 2006/112/EC (the “Principal VAT Directive”), which permits Member States to allow a right of option for taxation in respect of certain supplies, including supplies of land and buildings. Article 137(2) provides that Member States may restrict the scope of this right. The UK has chosen not only to allow an option to tax but also to restrict it pursuant to article 137(2). The domestic law provisions which give effect to this restriction are those in paragraphs 12 to 17 of Schedule 10, entitled “Anti-avoidance”. Their effect is to prevent an option to tax rendering supplies taxable where certain conditions are met. Despite the title, the conditions set out do not include any tax avoidance purpose.
Paragraph 12(1) is the main operative provision. It provides:
A supply is not, as a result of an option to tax, a taxable supply if–
- the grant giving rise to the supply was made by a person (the grantor) who was a developer of the land, and
- the exempt land test is met.
Both conditions (a) and (b) are in dispute in this case...
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