Agricultural land — Development company acquiring land in Scotland — Purchase price stated to be inclusive of VAT — Exemption — Taxable person making an election relating to sale of interest in land — Taxable person waiving exemption — Whether purchase price payable in full where seller not accountable for VAT on consideration for sale of land — Purchaser contending that sum comprising two elements: price and VAT — Seller contending that single sum tendered to be treated as VAT-inclusive — Judgment for the seller upheld on appeal
A development company, J, entered into missives with E for the purchase of agricultural land in Ayrshire. The purchase price was £1,650,000 (later amended to £1,685,000) and stated to be “deemed to be inclusive of value added tax”. J paid the whole sum to E on or about August 1 1990. An issue arose whether that figure did in fact include a sum in respect of VAT. Liability and accountability for VAT were regulated primarily by the Value Added Tax Act 1983, as amended. The tax applied to supplies of goods and services made by a taxable person in the course or furtherance of a business. Certain supplies were exempt from VAT. A sale of heritable property such as in the present case was covered by the exemption subject to certain provisions introduced by the Finance Act 1989 shortly before the initial offer was made by J. In the case of land, section 35(A) and Schedule 6(A) added to the 1983 Act enabled a taxable person to make an election in relation to the grant of an interest in land particularly specified in the election or of a description specified in the election, that the exemption provisions should not apply. Before the amendments were made a taxable person who sold land in a transaction which fell within the exemption was not accountable for VAT on the consideration. Input tax which the seller had incurred in the purchase of related taxable supplies of goods and services in the course of his business could not be recovered from the Commissioners. The tax might, like any other cost, be built into and passed on to the purchasers as part of the consideration on sale but no part of that consideration had the character of VAT. No amount could be treated as input tax by a taxable person making the acquisition in the course of business. Under the new provisions a taxable person making a relevant grant such as a sale of land might elect to waive the exemption. The seller was then accountable for tax and was entitled to credit for related input tax. A taxable person acquiring the interest had to pay tax but was entitled to credit for it in accounting for his own liability and in appropriate cases was entitled to recover from the Commissioner either the total tax or the excess over his own output tax, as circumstances required. J contended that on a sound construction of the terms of the contract the sum offered in this case contained two elements (based on the original purchase price): £1,434,782.61 as consideration for the land and VAT of £215,217.39. E contended that the price was £1,650,000 (amended to £1,685,000) payable whether or not E was accountable for VAT on the consideration for the sale of the land. The Lord Ordinary (Lord Coulsfield) preferred the construction for which E contended. J then reclaimed in the Court of Session.
Held The Lord Ordinary’s decision was upheld.
1. The introduction of a right of election to waive exemption for VAT in respect of transactions in land, exercisable by the seller of land, gave prospective purchasers an interest in the seller’s status as a taxable person and in any election which the seller might have made, or might be contemplating, affecting the subjects of the sale. Except where particulars of sale or other information provided by the seller of heritable subjects informed the market, a developer or other purchaser would be unlikely to know at the date of making an order whether the seller was a taxable person or whether the seller had already made a relevant election. Nor would he know whether the seller was likely to make an election prior to entry. Unless required to make an election by a term of the offer, the seller might be expected to consider whether to elect solely by reference to his own financial interest and accordingly by reference to facts and circumstances of a confidential nature.
2. If it followed from the stipulation that the price was VAT inclusive, that the seller could accept that part of the sum offered only if he were accountable, there were inevitably a number of elements in the description of the contingency on which the payment fell to be made that should be included in professionaly drafted missives. Proof liability to VAT would depend on production of evidence to the satisfaction of the agents for the purchaser, of an election which had effect in relation to the particular subjects, or to subject of a class to which they belonged, and of notice of the election to the Commissioners within the period provided in the Act. Notice might competently be given within a period which could extend up to 30 days after the date of entry. None of those mechanical provisions were present in the missives in this case.
3. It was not lightly to be assumed that commercial purchasers would commit themselves to payment on entry of a sum which was referable to a contingency other than physical occupation of the subjects which might not then have been and might not thereafter be purified. Without any stipulation as to the parties’ rights and obligations relative to that sum, potential purchasers of heritable subjects were undoubtedly placed at risk by the provision of the Finance Act 1989 of having their obligations materially increased by the seller’s actions in electing to waive tax exemption in the period between the conclusion of missives and entry. The funding of VAT might be a material consideration.
4. The contract had to be construed in the light of the circumstances that the offer was made to a seller whose tax status was not known in a situation in which there might have been or might not have been liability to VAT. In the context of the present contract the expression “which will be deemed to be inclusive of VAT” appeared to refer most naturally to an implied contingency. Those words were capable of meaning that the sum tendered was to be treated as VAT-inclusive if any VAT were payable. In the context of the contract as a whole, that meaning was to be preferred. Only one sum was tendered as the price payable on entry. In the result it included no VAT but that was one of the alternatives which the parties must have anticipated. In the absence of a provision of or retention or for repayment in that event, the contract had taken effect on its terms.
Thomas Drummond QC and Mark Stewart (instructed by Paull & Williamson, of Aberdeen) appeared for the purchaser, Jaymarke; and William Nimmo Smith QC and Iain Ferguson (instructed by Dundas & Wilson CS, of Edinburgh) appeared for the seller, Elinacre.
