Liability — Property mortgaged — Election to waive VAT exemption — Receiver appointed by mortgagee who collected rents inclusive of VAT — Whether tenants’ expectation to be defeated — High Court holding that receiver obliged to account to the Commissioners for VAT element — Commissioners entitled to treat receiver as taxable person for VAT — Appeal allowed in part — Accountability for VAT element upheld
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. 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. The company failed to pay the interest due and the bank appointed a receiver. The company had registered for VAT. The grant of an interest in land such as a tenancy was normally exempt from VAT, but an election could be made to waive the exemption and charge VAT on the rents. The company elected to charge VAT.
Following his appointment, the receiver retained the VAT element in the rents and applied for directions as to its disposal (regulation 11 of the Value Added Tax (General) Regulations 1985) provided that if a taxable person became incapacitated, the Commissioners might treat as a taxable person any person carrying on business as though he were a registered person. The High Court held that the receiver was obliged to account for the VAT element to the Commissioners. The Commissioners were entitled to treat the receiver as a taxable person within regulation 11: see [1993] EGCS 182. The receiver appealed.
Held The appeal was allowed in part.
1. The plaintiff’s appointment as receiver did not result in the company “going into receivership” within regulation 11(3). It was consistent with the purpose of regulation 11 to construe “going into receivership” as contemplating the general incapacity which would result, for example, from administrative receivership and not the partial incapacity resulting from the appointment of a receiver under the 1925 Act.
2. Notwithstanding the appointment of the plaintiff as receiver, the company continued to be a taxable person for VAT. The tax continued to be recoverable from the company as a debt due to the Crown.
3. VAT was a tax “affecting the mortgaged property” within section 109(8) of the 1925 Act. VAT, being chargeable in respect of the rents, affected the property in the same way, for example, as Schedule A income tax on the rents would have affected the property when the provision was enacted in 1925.
4. The VAT having been demanded and collected from the tenants, they must be assumed to have expected that it would be accounted for to the Commissioners. It could not be right for the holder of a discretion to exercise it to defeat the expectation of the tenants.
5. Though the company had not required the plaintiff to account for the VAT to the Commissioners, the plaintiff still retained his discretion and he had to exercise it properly. Faced with a choice between protecting the company against the potential serious consequences of failure to account to the Commissioners and paying an uncovenanted bonus to the bank, the plaintiff could not properly exercise his discretion by taking the latter course. The plaintiff was bound to account for the VAT to the Commissioners.
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.
