Stuart Pemble tries to explain the most confusing case he has ever summarised for Legal Notes
Key point
- The Supreme Court has resolved a complicated issue arising out of exercising the option to charge VAT on the sale of land
I don’t think I have ever begun a Legal Note with a disclaimer before. So, why not break that tradition with a two-for-one special offer? First: I am not a tax lawyer. Second: the decision of the Supreme Court in Moulsdale (trading as Moulsdale Properties) v Commissioners of HM Revenue and Customs [2023] UKSC 12; [2023] PLSCS 52 has to deal with statutory provisions (paragraphs 12 and 13 of Schedule 10 to the Value Added Tax Act 1994 and regulation 113 of the Value Added Tax Regulations 1995) which, when read together, do not make sense. I have approached this note with some trepidation.
That having been said, the decision of Lady Rose (with whom Lords Reed, Briggs, Sales and Hamblen agreed) can actually be summarised in misleadingly simple terms: the appellant, M, should have charged VAT on a property he had sold in September 2014. The sale proceeds were therefore treated as being inclusive of VAT and M had to pay £191,562 of the proceeds of sale to HMRC as VAT.
Value added tax
Where the VAT regime applies, a supplier charges VAT on its sales. This is output VAT. VAT is also charged to that supplier for the goods and services it purchases. This is input VAT. The supplier is collecting output VAT on behalf of HMRC and must pay that regularly. The amount paid by the supplier is reduced by the amount of input tax the supplier has incurred on its purchases. It only accounts for the net balance (and can claim a rebate if its input VAT exceeds its output VAT).
Supplies which are exempt from VAT can be both a commercial benefit and burden for the supplier. The supplier has the advantage of not having to charge VAT to its clients (making the supply cheaper and potentially more attractive to them), but it loses the ability to deduct input VAT from the output tax it would otherwise have charged to its clients.
The tax authorities are concerned to avoid mechanisms where taxable parties making exempt supplies look to get the benefit of the reduced price while avoiding the inability to deduct input tax. The provisions in issue in Moulsdale relate to such a mechanism.
VAT and property
Sales of land and buildings are normally exempt from VAT under Schedule 9, Group 1 to the 1994 Act. However, paragraph 1 to Schedule 10 allows a taxable person an option to tax transactions relating to a particular parcel of land. Where that option is exercised, the output tax charged must be accounted to HMRC.
However, Schedule 10 of the 1994 Act provides for the compulsory disapplication of the option to tax in certain circumstances, including where the party exercising the option to tax is a “developer”. This is intended to stop businesses which provide exempt supplies from recovering the input VAT they incur on capital purchases by using the option to tax land as a means of creating a supply subject to output tax.
And it is the mechanism for doing so in Schedule 10 which creates the conundrum. The schedule only applies where (as was the case here) the value of the land exceeds £250,000, the option to tax has been exercised and, notwithstanding the exercise of the option to tax, the land in question is caught by the schedule’s definition of an exempt supply. It has the effect of delivering outcomes which are the direct opposite of the seller’s intentions or expectations:
1. If the seller did intend or expect the purchaser to pay VAT, then the seller counts as a developer and Schedule 10 disapplies the option.
2. If the seller did not intend or expect the purchaser to pay VAT, the seller is not a developer and the option still applies. The seller should charge VAT.
This means that if the seller charges VAT, he is a developer, and no VAT is in fact payable because the option is disapplied.
The facts
It was this conundrum which M faced. He had exercised the option to tax in relation to the sold land, which was also an exempt supply (because it was leased to an optician, a business which is VAT exempt). M argued that, because he intended to charge, he was a developer and the option was automatically disapplied by Schedule 10. HMRC (and Lady Rose) disagreed. The correct approach to deciding whether or not the seller intended to charge VAT did not relate to VAT on the sale of the land itself, but VAT on some other capital expense in relation to it. There was no evidence (or argument) to support that intention.
Lady Rose stressed that Schedule 10 is “aimed at ensuring that exempt businesses cannot recover input tax”. If M’s approach was allowed, it would permit him to have the benefit of the option to tax so long as it was beneficial to him, but enable him to switch the option off and make a VAT-exempt sale if he did not want the purchaser to pay VAT.
Squaring the circle
Having started this note with two disclaimers, I will end it with another. The space available does not allow for a detailed analysis of the individual statutory provisions which the Supreme Court considered. The drafting is complicated and, before the clarity provided by this judgment, counter-intuitive. Anyone reading this who thinks it is relevant to their own business lives should speak to a VAT expert.
Stuart Pemble is a partner at Mills & Reeve
