Supreme Court resolves land VAT puzzle in HMRC's favour
An individual who exercised an option to tax transactions for VAT purposes in relation to land he had bought, thus enabling him to claim back input VAT he had paid on the purchase, was bound to charge VAT on a subsequent sale of the land and could not rely on sched 10 to the Value Added Tax Act 1994 as misapplying the option to tax.
The UK Supreme Court gave this ruling today in affirming the judgment of the Court of Session and refusing an appeal by David Moulsdale against an assessment to VAT following his sale of a property in Cumbernauld to an unconnected person, a company not registered for VAT, in 2014.
Sales of land and buildings are generally exempt from VAT by sched 9 to the 1994 Act, but para 1 of sched 10 gives a taxable person an option to tax transactions relating to a particular parcel of land; if exercised, VAT must be charged and accounted for whenever there is a sale of that land. Paragraphs 12 to 17 of sched 10 provide for compulsory disapplication of an option to tax in certain circumstances, in which case a sale of the property goes back to being a sale that is VAT exempt.
Mr Moulsdale argued that he did not charge VAT because sched 10 meant his option to tax was disapplied and the sale of the property was VAT exempt.
Lord Reed, Lord Briggs, Lord Sales, Lord Hamblen and Lady Rose disagreed. Speaking for the court, Lady Rose said the case turned on whether Mr Moulsdale was a "developer" of the land as defined in paras 12-17 of sched 10. Unfortunately, because of the way the provisions were drafted there was a conundrum in the legislation.
The effect of the relevant sched 10 provisions was that if Mr Moulsdale charged VAT then he was a developer of the land and VAT was not payable because the option to tax was disapplied; but if he did not charge VAT then he was not a developer and the option to tax still applied to the sale so he should charge VAT.
Mr Moulsdale argued for a broad construction of the provisions, contending that because he had exercised the option to tax, he did intend or expect that the purchaser would pay VAT on the purchase price. Because he had the relevant expectation, he was a developer of the land, and the sale was therefore exempt. One should not then go on to reconsider the disapplication of the option to tax.
However, the court ruled that the narrow construction put forward by HMRC was the correct construction, as it made as much sense as one could of the legislation. It agreed that for the purposes of these provisions, in order to decide whether the sale should bear VAT or not, the relevant intention or expectation as to whether the purchaser would pay VAT on a capital expense in relation to the building must be an intention or expectation about incurring VAT on some other cost, different from the actual price of the building itself. Thus, HMRC was correct that Mr Moulsdale should have charged VAT on the sale price.
Schedule 10 was aimed at ensuring that exempt businesses could not recover input tax. This purpose would be defeated on the construction Mr Moulsdale argued for. On his broad construction, the provisions would enable him to have the benefit of the option to tax the land as long as that was favourable to him, but enable him to switch off the option to tax simply by selling it if he did not want to have to charge the purchaser VAT on the purchase price.