Schedule 10 of the Value Added Taxes Act 1994 is aimed at ensuring that exempt businesses cannot recover input tax. Whether or not a sale of land and buildings bears VAT depends on whether the intention or expectation is that the purchaser will pay VAT on some cost, different from the price of the building itself.
In Moulsdale t/a Moulsdale Properties v Revenue and Customs (Scotland) [2023] UKSC 12 The Supreme Court has dismissed an appeal and upheld the narrow construction of the provisions of Schedule 10 of the 1994 Act contended for by HMRC.
Sales of land and buildings are generally exempt from VAT under Schedule 9 Group 1 to the 1994 Act. However, paragraph 1 of Schedule 10 gives a taxable person an option to tax transactions relating to a particular parcel of land. Where the option to tax is exercised VAT must be charged and accounted for to HMRC whenever there is a sale of that land.
Paragraphs 12-17 of Schedule 10 provide for compulsory disapplication of an option to tax where the seller is a developer of land and there is an intention or expectation that the purchaser will pay VAT for the sale price of the building. In such circumstances the sale reverts to being a VAT exempt sale.
In 2001 the appellant bought a building for a price to which VAT was added because the seller had opted to tax the land on which it was built. The appellant then himself exercised an option to tax the land which enabled him to recover from HMRC the VAT he had paid on the purchase.
In 2014 he sold the property to a company not registered for VAT and did not add VAT to the sale price. He argued that Schedule 10 operated to disapply his option to tax and so the sale of the property was VAT exempt. HMRC disagreed. The appellant challenged the decision all the way to the Supreme Court.
To avoid the circularity problem in paragraphs 12-17 of Schedule 10, which turn on whether the seller intends or expects the purchaser to pay VAT on the sale price for the building, HMRC interpreted the relevant intention or expectation as that the purchaser would pay VAT on some cost other than the purchase price.
Consequently, the appellant was not a developer and should have charged VAT which should have been paid over to HMRC. The Supreme Court agreed and dismissed the appeal.
Louise Clark is a property law consultant and mediator
