The Supreme Court has dismissed an appeal that a sale of a property that would normally be taxable due to the operation of the option to tax should be exempted by virtue of one of the anti-avoidance provisions of VATA 1994, Sch. 10 (Moulsdale t/a Moulsdale Properties v HMRC [2023] UKSC 12).
Mr Moulsdale had sold the property to Cumbernauld SPV Ltd, an unconnected company. There was no doubt that the sale was a genuine transaction. However, if the relevant law did apply there would not need to be any intention to avoid tax before the disapplication of the option to tax was triggered.
The appeal had arisen as a result of a circularity in the legislation, Lady Rose noting that “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”.
Analysis of the facts and legislation led to the circular position whereby:
“If Mr Moulsdale did intend or expect Cumbernauld SPV to pay VAT on the sale price for the building then, because the land is exempt land and the sale took place within the eligible time, he is a “developer of the land” and all the elements are in place for para 12(1) to disapply the option to tax so that the sale of the land reverts to being an exempt transaction on which Mr Moulsdale should not charge VAT. Conversely, if Mr Moulsdale did not intend or expect that Cumbernauld SPV would pay VAT on the price of the building, then the building would not become a relevant capital item in relation to Cumbernauld SPV so the sale would not be made by Mr Moulsdale as a developer of the land and the option to tax would apply, making the sale subject to VAT.
The problem with this is that the circumstance on which the application of the provision depends – whether Mr Moulsdale intends or expects Cumbernauld SPV to pay VAT on the price of the building – is entirely within Mr Moulsdale’s control as he is the person who decides whether to charge VAT on the sale or not. As I said at the outset, the conundrum is that if he charges VAT then he is a developer of the land and VAT is not in fact payable because the option to tax is disapplied but if he does not charge VAT then he is not a developer of the land and the option to tax still applies to the sale so that he should charge VAT.”
HMRC had argued that “the way to avoid circularity is by treating the reference to the creation of a capital item as a reference to a capital item other than the one which would arise on the grant.” The appellant had argued conversely that “because Mr Moulsdale has exercised the option to tax in relation to the land, he would ordinarily intend or expect that Cumbernauld SPV would pay VAT on the purchase price of the land. The inquiry should stop there and conclude that because of that expectation, Mr Moulsdale is to be treated as a developer of the land (assuming that, as here, all the other conditions for para 12 to apply are met). The grant is therefore exempt.”
The case was complex but Lady Rose noted in her detailed commentary that:
“I prefer the construction put forward by HMRC rather than that put forward by the Appellant. In my judgment, for the purposes of these provisions, the grantor’s intention or expectation as to the incurring of VAT bearing expenditure on a capital item must be an intention or expectation about incurring some other cost, different from the very expenditure to which the test in paras 12 and 13 is being applied in order to decide whether it should bear VAT or not. Adopting that construction of the provisions, the question of whether the taxpayer had adduced sufficient evidence about his intentions or expectations in respect of the grant itself falls away.”
And that:
“I therefore agree that one must start, as HMRC submit, with the principle that Schedule 10 is aimed at ensuring that exempt businesses cannot recover input tax … although the drafting of this legislation is unfortunate, the obvious purpose of the provisions would be defeated if they had the effect of rendering a normal commercial transaction such as this one exempt in circumstances where the owner of the land had, presumably for its own advantage, previously opted to waive the exemption and tax transactions relating to the land.”
She concluded that:
“I would refuse the appeal on the basis that, as HMRC submit, the construction for which they contend is the correct way for the court to make as much sense as it can of the text of the statutory provisions read in its appropriate context.”
https://www.bailii.org/uk/cases/UKSC/2023/12.html
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