Liability — Property mortgaged– Election by company to waive VAT exemption — Receiver appointed by mortgagee who collected rents inclusive of VAT — Whether receiver under duty to account for VAT element of rents or pay whole amount to mortgagee — High Court holding that receiver obliged to account to Customs for VAT element collected
The State Bank of Australia granted a loan facility of up to £12,920,000 to Lontrex Properties Ltd (“the company”) to acquire three properties. The company covenanted with the bank to pay on demand all moneys due and, as beneficial owner, charged the relevant property with the payment of all moneys covenanted to be paid by the company. The properties were tenanted and the company was entitled to receive all the rents. There was an express power to appoint a receiver under section 109 of the Law of Property Act 1925 after demand for payment to be the agent of the company and to have all the powers conferred by the 1925 Act.
The company failed to pay the interest due. The bank then demanded repayment of the loan and subsequently appointed a receiver. In the meantime the company had registered for VAT, with effect from March 24 1992. The grant of an interest in land such as a tenancy, was normally exempt from VAT: see Value Added Tax Act 1983, Schedule 6, Group 1. However, the taxable person could elect to waive the exemption and charge VAT on the rents: Schedule 6A, para 2. It would do that if it had large input taxes which it wished to set-off against its output tax. The company here elected to charge tax. Consequently, the lessees of the various properties were charged VAT on their rents. Following his appointment the receiver retained the VAT element in the rents in a separate account. He applied to the court under section 35 of the Insolvency Act 1986 for directions as to the disposal of the VAT element in the rents: regulation 11 of the Value Added Tax (General) Regulations 1985 (SI 1985 No 886) provided that if a taxable person became incapacitated, the Commissioners might treat as a taxable person any person carrying on his business as though he were a registered person.
Held The tax should be accounted for to the Commissioners through the company.
1. There was no reason to restrict the operation of regulation 11 to a single person carrying on the business of the company. The regulation could extend to a number of persons carrying on various parts of the business; neither was the regulation to be confined to any particular class of receiver. “Receivership” in the Insolvency Act applied to all kinds of receivers.
2. What was important was that the Commissioners should be able to collect the revenues which had been collected by others acting in the name of the primary taxable person. There could be no injustice to the bank. It expected to receive the rents, but it had no expectation that VAT would be added. The charging of the VAT was the choice of the company for the limited purpose of enabling it to set off its input tax. The waiver of the exemption was not imposed by the charges.
3. Section 109(8) of the Law of Property Act 1925 provided that a receiver should apply all moneys received by him in the discharge of all rents, taxes, rates and outgoings whatever affecting the mortgaged property. Its purpose was to preserve the property in the interest of both the mortgagee and the mortgagor by ensuring that the normal outgoings were duly discharged. VAT was a tax affecting the property within section 109(8).
Susan Prevezer (instructed by Saunders Sobell Leigh & Dobin) appeared for the receiver; Robert Jay (instructed by the solicitor to Customs & Excise) appeared for the Commissioners.
