VAT – Sale of land – Option to tax – Schedule 10 to Value Added Tax Act 1994 – Owner of land belatedly notifying respondents of exercise of option to tax certain land with effect from date of acquisition – Owner charging VAT on rent paid under lease granted day after acquisition – Land sold to appellants – Whether VAT chargeable on that supply – Whether exercise of option to tax invalid without respondents’ prior permission under para 3(9) of Schedule 10 – Whether respondents validly waiving any such requirement pursuant to para 30 – Appeal dismissed
In December 2011, the appellants purchased the freehold interest in a unit on a business park in Cardiff for use as a dental practice. The terms of the contract provided that the sale price of £650,000 was “plus VAT (if applicable)”. Since the appellants’ dental practice was exempt from VAT, they would be unable to recover any VAT that they paid in respect of the supply; however, they maintained that none was payable.
In August 2010, the vendor company, which was the trustee of a pension plan, had belatedly informed HM Revenue and Customs that it was opting to tax the property with effect from the date when it had first acquired it, in late March 2004. The vendor had always charged VAT on rental payments received under a lease of the property granted the following day to another dental practice run by members of the pension plan, and had accounted for tax on the basis that its supplies to the tenants were taxable. The late notification had been formally accepted in November 2010.
An issue arose over whether the supply to the appellants was in fact taxable by reason of the vendor’s exercise of the option to tax. The appellants contended that the option to tax had not been validly exercised since para 3(9) of Schedule 10 to the Value Added Tax Act 1994, which applied to supplies made before June 2008, had the effect of requiring the vendor to obtain the respondents’ prior permission before exercising the option to tax and it had failed to do so.
In April 2014, the respondents wrote to the vendor stating that, if prior permission to exercise the option to tax had in fact been required under the legislation, then the respondents were exercising their discretion under para 30 of Schedule 10 to dispense with that requirement and treat the option as valid. The vendor disclosed that letter to the appellants.
The first-tier tribunal (FTT) held that prior permission had not been required in respect of the option to tax since the conditions for the application of the anti-avoidance provisions in Schedule 10 did not apply and, accordingly, both the grant of the lease in 2004 and thus the sale of the property to the appellants were both taxable, rather than exempt, transactions: see [2014] UKFTT 646 (TC). It refused permission for a late amendment to the respondents’ case to argue that, if prior permission were in fact required, then they had validly dispensed with that requirement. The appellants appealed.
Held: The appeal was dismissed.
(1) The FTT had erred in its application of the anti-avoidance provisions in Schedule 10 to the 1994 Act. It should have found that the vendor was a “developer of the land” for the purposes of para 2(3AA) of Schedule 10, as defined in para 3A. it was common grounds that the property was a capital item in relation to the vendor. The second limb of para 2 (3AA) was also satisfied because the grantor, namely the trustee, intended the property to become “exempt land” by virtue of the grant of the lease to the tenants, who would occupy the property for an exempt use. The tenants were connected with the vendor within the meaning of para 3A(7)(c). The FTT had failed to apply the definition of a developer of land contained in para 3A or to para 3A(7), with the result that it had failed to appreciate that the supplies made by the vendor to the tenants were exempt supplies.
(2) Nonetheless, even on the assumption that the anti-avoidance provisions applied, the respondents’ prior permission was still not required in respect of the vendor’s option to tax. The purpose of para 3(9) of Schedule 10 was that it should apply to exempt supplies made or intended to be made before the election took effect, and that exempt supplies after that time would be dealt with under the usual partial exemption rules. The day on which the vendor’s election was intended to have effect was the date of the vendor’s acquisition of the property, with the effect that para 3(9) only required the prior permission of the respondents for exempt supplies made before that date. Since the grant of the lease to the tenants had taken place on the following day, no prior permission was required to exercise the option to tax.
(3) Per curiam: The respondents’ purported dispensation with the requirement for perior permission, if any, was a valid exercise of their discretion under para 30 of Schedule 10. It did not infringe the principle of legal certainty since para 30 was already in existence when the appellants purchased the property and, accordingly, any argument that they might have based on the prior permission issue was always subject to the operation of that provision: Grundsückmemeinscaft Schlossstrasse GbR v Finanzamt Paderborn (Case C-396/9810) [2000] ECR I-4279 distinguished. Nor was there any breach of the principle of legitimate expectation. When the appellants had bought the property, the vendor had thought that the sale was liable to VAT and the respondents had not given to the appellants any assurance that the sale would be anything other than a taxable transaction.
Rebecca Murray (instructed by The VAT Consultancy) appeared for the appellants; Hui Ling McCarthy (instructed by the legal department of HM Revenue and Customs) appeared for the respondents.
Sally Dobson, barrister
Click here to read transcript: Hills and another v Commissioners for HM Revenue and Customs
