Moulsdale v Commissioners for HM Revenue and Customs
| Jurisdiction | Scotland |
| Judge | Lady Rose,Lord Reed,Lord Briggs,Lord Sales,Lord Hamblen |
| Judgment Date | 22 March 2023 |
| Neutral Citation | [2023] UKSC 12 |
| Court | Supreme Court (Scotland) |
[2023] UKSC 12
Lord Reed, President
Lord Briggs
Lord Sales
Lord Hamblen
Lady Rose
Supreme Court
Hilary Term
On appeal from: [2021] CSIH 29
Appellant
Philip Simpson KC
David Small
(Instructed by Harper Macleod LLP (Glasgow))
Respondent
David Thomson KC
Elisabeth Roxburgh
Ross Anderson
(Instructed by the Office of the Advocate General (Scotland))
Heard on 17 January 2023
Lady Rose ( with whom Lord Reed, Lord Briggs, Lord Sales and Lord Hamblen agree):
It is a fundamental feature of the Value Added Tax regime that traders who carry on an economic activity which is exempt from VAT have the advantage that they do not have to add VAT on to the prices that they charge their customers. But they also have the disadvantage that they are denied the opportunity to deduct or claim back the input VAT that they pay when buying in the goods and services they use in their business. As Lord Hoffmann put it in Principal and Fellows of Newnham College in the University of Cambridge v Revenue & Customs Commissioners [2008] UKHL 23, [2008] 1 WLR 888, para 1 “Making exempt supplies is all very well for the recipients, because they pay no VAT. It is less attractive if you are the supplier, because you are not credited with the input tax on the goods and services on which you have been charged VAT.”
For that reason, the Respondents HMRC, and HM Treasury are alert to mechanisms which taxable traders running exempt businesses might use in order to get that benefit without bearing that burden. The legislation that the court must analyse in the present appeal is aimed in part at preventing that kind of mechanism being used in respect of transactions in land.
Drafting tax legislation is a difficult and complex task so it is not surprising that sometimes the legislation does not quite work. It is common ground that this appeal arises because of one such occasion. Problems can arise in particular where, as here, provisions that were drafted in an enactment for one purpose are incorporated by cross-reference into a different enactment dealing with something else. The drafter does not spot that there might be a circumstance in which the imported provisions which work perfectly well in their original setting, create a conundrum in their new setting. If that circumstance arises, it falls to the court to decide how the legislation applies, giving effect to Parliament's intention and the purpose for which the provisions relevant to the appeal were enacted.
The dispute between HMRC and the Appellant, Mr Moulsdale, arises over whether Mr Moulsdale ought to have charged VAT on the sale price of a property which he sold to an unconnected purchaser in September 2014. The legislation which determines whether VAT is chargeable on that sale of his land is Schedule 10 to the Value Added Tax Act 1994 (“ VATA”) (“Schedule 10”), given effect by section 51 VATA. Very broadly, the effect of the provisions as drafted appears to be that if Mr Moulsdale intended or expected to add VAT to the price he was charging for the land, then VAT was not chargeable on the sale so he did not need to add VAT. But if Mr Moulsdale did not intend or expect that the purchaser would pay VAT on the price, then the transaction was liable to VAT and so he ought to have added VAT to the purchase price.
Mr Moulsdale in fact did not charge VAT on the price of the land charged to the purchaser but HMRC subsequently assessed him to VAT as if the sale price had been inclusive of VAT. HMRC took the view that the way out of the problem generated by the provisions resulted in VAT being payable. Mr Moulsdale appealed against that assessment. His appeal was refused by the First-tier Tribunal, by the Upper Tribunal and by a majority in the Court of Session Inner House. He now appeals to this court.
Mr Moulsdale bought a building in Westfield, Cumbernauld on 3 May 2001 for a purchase price excluding VAT of £1,140,000. Generally, transactions in land are exempt from VAT in accordance with VATA 1994, Schedule 9 Group 1. However, para 1 of Schedule 10 gives a taxable person an option to tax transactions relating to a particular parcel of land. Para 1 of Schedule 10 provides that if a person exercises the option to tax any land under Part 1 of Schedule 10, and a grant is made in relation to the land at any time when the option to tax it has effect, then the grant does not fall within Group 1 of Schedule 9. Para 20 of Schedule 10 provides that an option to tax has effect only if HMRC are notified within the specified time. It can be revoked under para 23 during a six month “cooling off” period provided that no tax has become chargeable as a result of the option and if certain other conditions are met.
Where the option to tax is exercised VAT must be charged and accounted for to HMRC. However, the option to tax is not effective if the grant of land falls within paragraphs 12 to 17 of Schedule 10. If the option to tax is disapplied, then the grant is exempt and no VAT can be charged by the person even though they exercised the option to tax in relation to that land.
The person who sold the land on 3 May 2001 to Mr Moulsdale had exercised the option to tax the land and so charged Mr Moulsdale VAT of £199,500 in addition to the net sale price of the property. On 9 May 2001, Mr Moulsdale himself exercised the option to tax transactions relating to the property and he successfully claimed back from HMRC almost all of the VAT he had paid to the vendor in his VAT return for the period ending June 2001.
In September 2001, Mr Moulsdale leased the property to Optical Express (Westfield) Limited (“Optical Express”). Optical Express operated a business as an optician from the property. That business is a VAT exempt business so that Optical Express did not charge VAT on the sales it made to its customers. From the start of the lease, Mr Moulsdale charged Optical Express VAT on the rent payable under the lease, reflecting, he thought, the fact that he had opted to tax the property. He accounted to HMRC for the VAT collected from Optical Express. However, in 2007 there was a VAT inspection and Mr Moulsdale was told that even though he had opted to tax the property, the lease to Optical Express was still an exempt supply because the option to tax was disapplied in these circumstances. That was because Optical Express was a person connected with Mr Moulsdale for the purposes of Schedule 10 so that the lease fell within one of the paragraphs of Schedule 10 which disapply the option to tax on particular transactions. Mr Moulsdale ought not to have been charging Optical Express VAT on the rent.
In early September 2014, Mr Moulsdale sold the property to Cumbernauld SPV Ltd (“Cumbernauld SPV”). The property was sold subject to the lease in favour of Optical Express. The price was £1,149,374. Mr Moulsdale did not charge Cumbernauld SPV VAT on the sale price. Cumbernauld SPV is not connected with Mr Moulsdale for the purposes of Schedule 10. Cumbernauld SPV was not VAT registered at the time it bought the property and did not notify HMRC that it was exercising the option to tax the land. The property became part of Cumbernauld SPV's property leasing business.
The reason why Mr Moulsdale thought that he should not charge tax on the sale price of the land to Cumbernauld SPV, even though he had exercised the option to tax the land, was because he was advised that the transaction fell within one of the exceptions in Schedule 10. This disapplied the option to tax so that the transaction reverted to being an exempt land transaction. HMRC disagreed and told Mr Moulsdale that the transaction did not fit within the provisions that disapply the option to tax. They assessed Mr Moulsdale for output VAT as if the sale price of the land included VAT. HMRC issued Mr Moulsdale with a decision notice and a notice of assessment of VAT of £191,562, treating the purchase price of £1,149,374 as a VAT inclusive figure.
The present version of Schedule 10 was re-written in 2008: see the Value Added Tax (Buildings and Land) Order 2008 (SI 2008/1146). That did not affect the continuity of the law.
The starting point is para 2 of Schedule 10 which provides that the effect of the exercise of the option to tax is that the grant is no longer exempt, that is to say, it becomes a transaction subject to VAT if it would be taxable, but for that land exemption:
“2.—Effect of the option to tax: exempt supplies become taxable
(1) This paragraph applies if—
(a) a person exercises the option to tax any land under this Part of this Schedule, and
(b) a grant is made in relation to the land at any time when the option to tax it has effect.
(2) If the grant is made—
(a) by the person exercising that option, or
(b) by a relevant associate (if that person is a body corporate),
the grant does not fall within Group 1 of Schedule 9 (exemptions for land).
(3) For the meaning of ‘relevant associate’, see paragraph 3.”
These provisions implement the United Kingdom's obligations under Council Directive 2006/112/EC on the Common System of Value Added Tax. Article 135(1)(j) to (l) provides that supplies of land or buildings are ordinarily exempt from VAT, and that includes the leasing or letting of immovable property. Article 137 provides that Member states may allow taxable persons a right of option for taxation in respect of the supply of buildings or parts of buildings, of the land on which the building stands, the supply of land that has not been built on or the letting and leasing of immovable property. Article 137(2) provides further that Member states must lay down detailed rules...
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