Moulsdale (trading as Moulsdale Properties) v Commissioners of HM Revenue and Customs

Taxation – Value added tax – Exemptions – Appellant opting to tax following purchase of commercial property – Appellant selling property to unconnected third party – Respondent commissioners raising VAT assessment – Appellant unsuccessfully challenging assessment – Appellant appealing – Whether land intended or expected to be relevant capital item – Whether option to tax by appellant in respect of property disapplied – Whether supply of property exempt from VAT – Appeal dismissed In May 2001, the appellant purchased commercial office premises at 5 Deerdykes Road, Westfield, Cumbernauld, and exercised an option to tax in respect of the property in terms of paragraph 2 of schedule 10 to the Value Added Tax Act 1994. In September 2014, he sold the property to C Ltd, which was not registered for VAT. The appellant did not charge VAT on the basis that schedule 10 meant his option to tax was disapplied and so the sale was exempt from VAT. Paragraph 12(1) of schedule 10 provided that one condition for an existing option to tax to be disapplied was that the land to which the supply related had to be or was expected to become a capital item. The respondent commissioners considered that the sale of the property was a taxable supply for VAT purposes as the requirements of paragraph 12 were not met and so the option to tax in respect of the property was not disapplied and the property was not exempt from VAT. The First-tier Tribunal (FTT) dismissed the appellant’s appeal against that decision on the basis that, in applying regulation 113(1) of the Value Added Tax Regulations 1995, the appellant could not have intended or expected that the property would become a capital item in the hands of the purchaser and the disapplication provisions were not engaged. The Upper Tribunal upheld that decision: [2019] UKUT 72 (TCC). The Court of Session agreed: [2021] CSIH 29. The appellant appealed. Held: The appeal was dismissed. (1) The dispute between the parties was whether the appellant ought to have charged VAT on the sale price of the property. The legislation which determined whether VAT was chargeable on that sale was schedule 10 to the Value Added Tax Act 1994, given effect by section 51 of the 1994 Act. The purpose of paragraphs 12 to 17 of schedule 10 was to prevent businesses which provided exempt supplies from recovering the input VAT they incurred on capital items by using the option to tax land to create a VAT-bearing output supply (ie, the VAT-bearing supply of the opted land) in addition to the exempt supplies of their ordinary business so that they had some output tax against which to set their input credit. If the appellant 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 the appellant 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. (2) If the appellant intended or expected C Ltd to pay VAT on the sale price for the building then, because the land was exempt land and the sale took place within the eligible time, he was a “developer of the land” and all the elements were in place for paragraph 12(1) to disapply the option to tax so that the sale of the land reverted to being an exempt transaction on which the appellant should not charge VAT. Conversely, if the appellant did not intend or expect that C Ltd would pay VAT on the price of the building, then the building would not become a relevant capital item in relation to C Ltd. The sale would not be made by the appellant as a developer of the land and the option to tax would apply, making the sale subject to VAT. In order to avoid that circularity, for the purposes of the relevant provisions, the grantor’s intention or expectation, as to the incurring of VAT-bearing expenditure on a capital item, had to be an intention or expectation about incurring some other cost, different from the very expenditure to which the test in paragraphs 12 and 13 was being applied in order to decide whether it should bear VAT or not. Adopting that construction of the provisions, the question whether the taxpayer had adduced sufficient evidence about his intentions or expectations in respect of the grant itself fell away. (3) Paragraph 13(8) of schedule 10 provided that a “capital item” meant an asset falling to be treated as a capital item for the purposes of the 1995 regulations. It was important to bear in mind that the court’s task in this appeal was to construe paragraph 13 of schedule 10 in its context so as to give effect to the purpose for which paragraph 13, as part of paragraphs 12 to 17 of schedule 10, was enacted. One had to start with the principle that schedule 10 was aimed at ensuring that exempt businesses could not recover input tax. It did not make sense for the subjective intention or expectation of the grantor to relate to whether tax was chargeable on the acquisition cost itself because that led one into the circularity problem. (4) Although the drafting of the legislation was unfortunate, the obvious purpose of the provisions would be defeated if they had the effect of rendering a normal commercial transaction, such as the present, 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. Furthermore, paragraphs 12 to 17 were intended to limit the right conferred on taxpayers to opt to treat their land as generating taxable rather than exempt supplies, when it was to their advantage to do so. Those anti-avoidance provisions eroded that entitlement and so should be narrowly construed. The curiosity of this case was that the appellant, rather than the respondents, was arguing that the anti-avoidance provisions should be broadly construed so as to disentitle his reliance on the option to tax which he had exercised. But that should not stand in the way of the narrow construction. The appellant should have charged VAT on the sale price. Philip Simpson KC and David Small (instructed by Harper Macleod LLP of Glasgow) appeared for the appellant; David Thomson KC, Elisabeth Roxburgh and Ross Anderson (instructed by the Office of the Advocate General (Scotland)) appeared for the respondent. Eileen O’Grady, barrister Click here to read a transcript of Moulsdale (trading as Moulsdale Properties) v Commissioners of HM Revenue and Customs