Moulsdale (t/a Moulsdale Properties) v R & C Commissioners

JurisdictionScotland
CourtCourt of Session (Inner House)
Judgment Date20 May 2021

[2021] CSIH 29

Inner House (Court of Session)

Lord President, Lord Menzies, Lord Doherty

Moulsdale (t/a Moulsdale Properties)
and
R & C Commrs

Simpson QC; Harper Macleod LLP appeared for appellant

DM Thomson QC, RG Anderson; Office of the Advocate General appeared for respondents

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 Court of Session dismissed the taxpayer's appeal against a decision of the UT (which agreed with the FTT before it) that a property sale was taxable. The taxpayer argued that the effect of anti-avoidance legislation was that his option to tax had been disapplied and the property sale was therefore exempt from VAT.

Summary

Moulsdale owned an office building which he leased to a connected company. In 2014 he sold the property, with its sitting tenant, for just over £1million to a third party in an arms length transaction on condition that the tenant would continue to lease the building. (The sale was not a transfer of a going concern because the purchaser was not registered for VAT).

The property was originally purchased in 2001. Moulsdale opted to tax the building and, initially, charged VAT on the rent. However, because the tenant was a connected party and made exempt supplies, the anti-avoidance legislation contained in VATA Sch. 10, para. 12–17 meant that Moulsdale's option to tax was disapplied.

When the building was sold in 2014 Moulsdale treated the sale as exempt. HMRC determined that, in relation to this transaction, the option to tax was not disapplied and issued an assessment on the grounds that the sale was standard rated. In a decision upheld by the UT ([2020] BVC 527), the FTT ([2018] TC 06539), dismissed Moulsdale's appeal.

As summarised at para. 9 of the decision, under VATA Sch. 10 the option to tax is disapplied if a grant over land is made by a “developer” and the “exempt land test” is met. It was accepted that in this case the exempt land test (contained in VATA Sch. 10 para. 15) was met. The dispute centred on whether or not Moulsdale was a developer of the land, as defined in VATA Sch. 10 para. 13.

Moulsdale would be a developer of the land if, at the time of the sale, it was “intended or expected” that the land would be a capital item (i.e subject to the capital goods scheme) in relation to either Moulsdale or the purchaser (VATA Sch. 10 para. 13(4)); and the grant was made at an eligible time. It was accepted that the grant was made at an eligible time (para. 9).

The land was not a capital item for Moulsdale. Although it had been purchased for more than £250,000 + VAT, the purchase was more than 10 years ago and the capital goods scheme had ended.

The question before the court was whether or not Moulsdale “intended or expected” that it would be subject to the capital goods scheme in the hands of the purchaser. In order for the land to be subject to the capital goods scheme, the purchaser had to buy it for more than £250,000 + VAT. The FTT, UT and the Court of Session all noted that the legislation had a circular result.

Moulsdale could only “intend or expect” that it was subject to the capital goods scheme if he charged VAT, in which case the anti-avoidance legislation applied and the sale was exempt. On the other hand, if Moulsdale did not charge VAT, and did not therefore intend or expect that it would be subject to the capital goods scheme, the anti-avoidance legislation did not apply and, because he had opted to tax, the sale was standard rated.

Lord Carloway and Lord Menzies both concluded that the question of whether or not Moulsdale either intended or expected that the land would be a capital item in the hands of the purchaser was a question of fact. Questions of fact are to be determined by the FTT and Moulsdale had failed to satisfy the FTT that he either intended or expected the capital goods scheme to apply. As he did not intend or expect the land to be a capital item, his option to tax was not disapplied and the sale should have been subject to VAT (see para. 16 and 21).

Lord Doherty considered that the FTT had erred in law by adopting a too narrow approach to the construction of VATA Sch. 10 para. 13. He noted that the purpose of the legislation was to deny input tax recovery to exempt businesses and concluded that the FTT, and the UT, had been led into error because they misunderstood the “true purpose” of the provisions (para. 54). Lord Doherty would have remitted the case back to the FTT for further consideration (para. 57).

Comment

The inherent circularity of the anti-avoidance legislation was noted by all three of the courts which considered the case. Unfortunately, the Court of Session offers little in the way of practical guidance to assist taxpayers and their advisors when navigating the rules.

OPINION
Lord Carloway

[1] I am grateful to Lord Doherty for setting out the facts, issues and submissions in this appeal. Ultimately, I consider that the Upper Tribunal correctly refused the appeal from the First-tier Tribunal and that therefore these appeals ought also to be refused.

[2] A central principle of Value Added Tax is that the incidence of tax should rest primarily with the final consumer in the supply chain. In May 2001 the appellant bought land, on which a block of offices had been built, from a developer. The land was in Cumbernauld and the price was £1,140,000 plus VAT of £199,500. In September 2001, the appellant leased the offices to Optical Express; a company with which he was connected. He opted to tax the land (Value Added Tax Act 1994 Sch 10 part I). It is a reasonable assumption that he did so with the intention of setting off the output tax, which he had paid to the developer, against the input tax, which he would receive on any rent and which, but for the offsetting, he would have to pay to the respondents.

[3] The effect of opting to tax would normally be that any grant of an interest in the land, such as the sale of the offices, would be liable to VAT (ie what would otherwise be an exempt supply would become taxable). However, in certain circumstances, the statutory provisions reverse that position by deeming the supply to be, once again, exempt.

[4] The services supplied by Optical Express are exempt from VAT. Optical Express would not be able to pass on any VAT which was charged on the rent to the consumers of optical services. This, in turn, would mean, in effect, that the VAT paid by the appellant at the start of the chain would not be passed on to the consumers either. In 2007, the respondents advised the appellant that he ought not to have been charging VAT to Optical Express since the rent was exempt. Although the appellant would thus be able to reclaim the VAT on the rent, which had been paid by Optical Express and for which he had accounted to the respondents, the practical effect was that he could not offset these payments against the VAT which he had paid on the purchase of the offices in the first place.

[5] In September 2014, the appellant sold the offices in an arm's length transaction to a third party company, subject to the continuing occupation of Optical Express under the lease. The third party was not VAT registered. The appellant did not charge VAT on the sale. The question is whether he was correct not to do so.

[6] Since the default position is that the sale of land, on which an option to tax has been made, is subject to VAT, avoiding payment of that VAT can only be achieved if the appellant were able to bring himself within a statutory exception. He attempts to do so by relying on the provisions in Schedule 10 to the 1994 Act. These are described, in a general heading to paragraphs 12 to 17, as “Anti-avoidance” measures. The use of anti-avoidance measures to avoid accounting for tax is a curious, if not anomalous, situation indeed. It is one which, for the following reasons, is not a sound one.

[7] The anti-avoidance provisions are intended “to prevent an option to tax rendering supplies taxable where certain conditions are met” (PGPH Ltd [2017] TC 06189, Judge Falk at para 6). In the case of land, this is to prevent, for example, the opportunity to deduct input tax when a further supply of the land is made, but the supplier continues to occupy the land for exempt purposes. Thus, the price and rent in a sale/lease and leaseback arrangement involving a connected tenant (Corporation Tax Act 2010, s 1122), whose supplies were exempt, would not be taxable. This maintains the principle of VAT being levied on the final consumer.

[8] Against the background of the Capital Goods Scheme (VAT Regulations 1995 Part XV), which normally enables the VAT-bearing purchaser of land to offset the VAT on the price against that on the incoming rent over a specified period of years (reg 114), the anti-avoidance provisions cease to have a purpose once that period expires. The option to tax would then continue to operate.

[9] So far as relevant to the facts, paragraph 12 (which is headed “Developers of exempt land”) of Schedule 10 provides that a supply is not taxable, as a result of an option to tax, if two conditions are met. The first is that the grant giving rise to the supply is made by a developer. The second is that the “exempt land test” is fulfilled. In relation to the first, “developer” does not have an ordinary meaning. In terms of paragraph 13, a grant is made by a developer if, again, two conditions are met. The first is that the land is, or was intended or expected to be, a “relevant capital item”. The second is that the grant is made at an eligible time in relation to that capital item. The question of time will be considered in due course, although it was not a matter of significance in the arguments presented to the FtT or the UT, nor did it feature in...

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