Argyll House Developments For Judicial Review

JurisdictionScotland
JudgeLord Woolman
Judgment Date2009
Neutral Citation[2009] CSOH 131
Published date24 September 2009
CourtCourt of Session
Date24 September 2009

OUTER HOUSE, COURT OF SESSION

[2009] CSOH 131

OPINION OF LORD WOOLMAN

in the Petition of

ARGYLL HOUSE DEVELOPMENTS

Petitioners;

for

Judicial Review

________________

Petitioners: Logan; Campbell Smith

Respondents: Mrs Wolffe, Q.C., Shepherd & Wedderburn, LLP

24 September 2009

Introduction

[1] The petitioner was incorporated on 12 September 2006 with a view to developing a retail site at West Port in Dundee. From 2006 onwards, it incurred various expenditure in respect of the development. However, it only registered for VAT from 1 August 2007. Subsequently, the petitioner applied to reclaim VAT input tax in respect of its expenditure on the development since 2006. Her Majesty's Commissioners of Revenue and Customs ("HMRC") restricted the input tax recoverable. They only allowed recovery of sums incurred in the six month period prior to the petitioner's registration.

[2] The petitioner now seeks to recover the disallowed element, which amounts to £16,692.26. It founds its claim on an extra statutory concession contained in HMRC Public Notice 742A. That indicates that in certain circumstances, input tax may be recovered beyond the six month cut-off point. HMRC maintain that the concession does not apply to the petitioner.

[3] The VAT Tribunal has no jurisdiction to review decisions about the application of extra statutory concessions. Accordingly, the petitioner has brought the present petition for judicial review. It challenges the decision by HMRC to refuse the balance of its claim on the basis that HMRC acted irrationally in holding that the extra statutory concession was inapplicable. The petitioner also maintains that the concession gave rise to a legitimate expectation that the input tax was recoverable.

The Legislative Framework

[4] The principal United Kingdom legislation is contained in the Value Added Tax Act 1994 and the VAT Regulations 1995 (SI 1195/2518). Their respective provisions implement various European Council Directives on the common system of Value Added Tax. The four key elements of VAT are well known. First, it is a tax imposed on the supply of goods and services by a business: 1994 Act, section 1. Secondly, before VAT arises, there must be a taxable person and a taxable supply: section 4. Thirdly, a taxable person is someone who is, or requires to be, registered for VAT: section 3. Fourthly, at the end of each accounting period, the taxable person must pay the difference between his output tax and his allowable input tax: section 25. Output tax relates to supplies made by a taxable person. Input tax comprises supplies made to him: section 24.

[5] For present purposes, it is important to note that a taxable supply is a supply of goods or services, other than an exempt supply: section 4 (2). Where a business makes an exempt supply, no VAT is charged. It follows that someone who is not registered for VAT cannot properly speak of inputs or outputs. Complex rules apply to commercial land and buildings. They may fall into the exempt category: section 31 and Schedule 9 (Group 1). Where they do so, it is open to the taxpayer to waive the exemption: Schedule 10. In other words, the taxpayer can elect to render its supplies taxable. The advantage of this "opt to tax" is that it allows input tax to be reclaimed.

[6] The 1995 Regulations contain provisions that cover persons who switch between making taxable and exempt supplies. Where a taxable person changes his intention from making standard rated to exempt supplies, HMRC can claw back input tax already claimed for a maximum period of six years: Regulation 108. Similarly, if the taxable person changes his intention from making exempt to taxable supplies, he can seek to recover the input tax for the same period: Regulation 109. In each case, the six year adjustment period only applies during the time when the taxable person was registered. It is therefore of little benefit to newly registered persons.

[7] There is a further provision that directly assists such persons. They can make an exceptional claim for relief in respect of pre-registration supplies. HMRC may "treat as if it were input tax" the VAT which has been incurred prior to registration: Regulation 111. Such a claim must be made on the first return the taxable person is required to make. It cannot be made at any later point, unless HMRC otherwise allows: Reg. 111 (3).

[8] However, there is a time limit for such claims. Relief is not available in respect of services supplied to the taxable person "more than 6 months before the date with effect from which the taxable person was, or was required to be, registered": Reg. 111 (2) (d). It was on that basis that HMRC allowed part of the petitioner's claim in this case. The time limit for goods is longer. Claims in respect of goods can be made for a period of up to three years prior to registration: Reg. 111 (2) (b).

[9] The extra statutory concession relied upon by the petitioner is contained in Public Notice 742A. It was issued in March 2002 and re-issued in June 2008. The relevant section states:

"9.4 What about the VAT I incurred prior to my registration?

You may find that you become registered for VAT as a result of opting to tax. Special rules apply to all newly registered persons under which they may be entitled to claim relief for VAT incurred on supplies they obtained before registration. Relief is restricted on supplies of services to those received not more than 6 months before your registration. This restriction may lead to inequitable treatment compared with a business carrying out similar activities, but who was already VAT registered when the tax was incurred. If you consider you have suffered because of this you should write to your local tax office and explain your circumstances. In all cases relief for VAT incurred before registration is restricted to tax which can be directly attributed to a taxable activity. If you incurred tax before registration that was attributable both to exempt supplies before registration as well as taxable supplies after registration, the relief will be restricted proportionately."

[10] HMRC guidance on the matter is also to be found in "V-13 Input Tax". That guidance is principally intended for internal use, but it is published on the internet and therefore available to taxpayers and their advisers. It states:

"A strict application of the Regulation [111] would therefore mean that a newly registered person was not treated equally with a person who was registered when the tax was incurred. It is accepted that this is an anomaly and we will consider granting extra statutory remission in suitable cases."

The Petitioner's VAT History

[11] When the petitioner applied to register for VAT, it completed and sent the prescribed form (VAT 1) to HMRC. The form contained the following information:

a) The petitioner's main activities would be property management and property development.

b) It sought voluntary registration, as its turnover would be below the registration threshold.

c) It intended to make taxable supplies in the future.

d) It did not expect the VAT on its purchases to regularly exceed its taxable supplies.

[12] On receipt of the form, HMRC sent a standard "request for information" letter to the petitioner, enclosing two further documents: (i) a property questionnaire; and (ii) Form V1614, which is headed "Option to Tax Land and/or Buildings (Election to Waive Exemption) Notification Form". The letter stated that the information was required "so that your liability to be registered for VAT and the appropriate date of registration can be determined".

[13] The questionnaire contained a number of questions and the following statement:

"*The sale of commercial property over three years old and the letting of commercial property are EXEMPT supplies. To make these supplies taxable, so that you can charge VAT and also recover input tax in relation to the property, you will need to exercise an option to tax. If you wish to do this please complete and return the enclosed form VAT 1614."

[14] The questionnaire was returned by the petitioner on 3 October 2007. It was completed and signed on its behalf by one of its directors, Lawrence Duncan. In the reply section of the completed questionnaire, the petitioner indicated (a) that its intention was to develop the property for sale; (b) that it expected to make its first taxable supply on 1 October 2006; and (c) that the expected completion date of the development was 1 January 2009.

[15] Form V1614 contains a box at the top of the form, which states "Attention - complete this form only to notify your decision to opt to tax land and /or buildings. Before completion, it is strongly recommended that you read VAT notice 742A (Opting to tax land and buildings) ..." No completed form was returned by the petitioner in October 2007. Its reply to HMRC contains the handwritten words "not applicable in this case", which apparently refer to the V1614 form.

[16] On 9 January 2008, the petitioner sent a completed Form V1614 to HMRC. It stated that it wished to opt to tax from 1 January 2008 and that it had made no exempt supplies. It did not provide any further information about its intentions in relation to the subjects. HMRC acknowledged receipt of the application on 25 January 2008.

[17] The petitioner also lodged a VAT return for the period ending...

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