Compulsory acquisition of land — Building works Reinstatement — Assessment of compensation payable — VAT repaid on reinstatement works — Whether reasonable cost of equivalent reinstatement including VAT repaid — Appeal dismissed
The first appellant held a lease of land and buildings for the fourth and fifth appellants. The land, which was compulsorily acquired by the respondent, contained a sports hall and other buildings. Pursuant to section 5 of the Land Compensation Act 1961, compensation was to be assessed on the reasonable cost of equivalent reinstatement, excluding compensation for operational enhancements.
The second and third appellants were incorporated to manage the affairs of the fourth and fifth appellants. Any profits earned by the third appellant were to go to the second appellant charity. Both companies were registered for VAT purposes. In November 1996, the commissioners for Customs & Excise advised the third appellant that, because it was profit-making body, it did not qualify for VAT exemption. Thus, its main activities would be wholly taxable, allowing for the recovery of any input tax that it incurred.
Planning permission had been obtained for a replacement sports centre to be built on other land. The reinstatement works were duly completed, the third appellant having paid the building contractor’s VAT. The respondent made compensation payments totalling £10m including VAT.
The third appellant recovered the VAT paid in respect of the works. However, the third appellant and the commissioners subsequently entered into a dispute regarding the deduction of the VAT. The commissioners eventually gave assurances that they would waive their claim to certain VAT repayments under the Sheldon doctrine, whereby they may waive the strict application of tax rules in individual cases where a taxpayer has been misled by the commissioner’s own error or misapplication of the law.
At first instance, the Lands Tribunal had held that it was proper to rely upon the assurances given under the Sheldon doctrine, so that the VAT paid to contractors should be ignored when assessing compensation. The appellants appealed on the ground, inter alia, that the respondents could not show that it was “clear beyond peradventure” that the VAT might not be reclaimed in the future.
Held: The appeal was dismissed.
The only reasonable conclusion that the tribunal could properly have reached was that the input tax should be excluded from the compensation.
The function of the tribunal was not to rule on a complicated point of tax law but to decide a question of compensation law concerning the reasonable cost of equivalent reinstatement. It was therefore required to take a reasonable view of the likelihood of recovery of the repaid VAT on the evidence before it. That fell to be assessed like any one of the many other contingencies that might affect compensation following a compulsory acquisition of land.
Although the acquiring authority’s interest in not overpaying did not outweigh the owner’s interest in being fully paid for the land being acquired, it was important not to lose sight of the public interest in ensuring that the compensation did not exceed the owner’s loss.
In the light of the assurances received from the commissioners, the third appellant had failed to establish, on the balance of probabilities, that there was a real risk that the VAT might have to be repaid: Stoke-on-Trent City Council v Wood Mitchell & Co Ltd [1978] 2 EGLR 21; (1978) 248 EG 870 distinguished.
Leoline Price QC and Evan Price (instructed by Gullands Solicitors, of Maidstone) appeared for the appellants; John Litton (instructed by the Treasury Solicitor) appeared for the respondent.
Eileen O’Grady, barrister