Plaintiff’s administrators selling freehold to defendant – Plaintiff discovering sale was taxable supply and accounting for VAT – Whether contract of sale provided for VAT inclusive or VAT exclusive consideration – Whether defendant obliged to pay sum equivalent to VAT – Judge holding defendant not liable to pay VAT – Appeal allowed
By a written agreement dated 22 February 1991 (the contract) the plaintiff’s administrators agreed to sell the freehold of Ketley Business Park, Telford, to the defendant. The business park comprised two parts: phase I, to which a value of £2.22m was attributed, and phase II, to which a value of £715,000 was attributed, making a total of £2,935m. Clause 2(a) of the contract stated: “The purchase price for the Freehold property shall be the sum of Two million nine hundred and thirty five thousand pounds (£2,935,000) exclusive of Value Added Tax. The Vendor undertakes and warrants that no election to charge Value Added Tax has been or will (prior to completion) be made by it in respect of the Freehold Property and accordingly no Value Added Tax will be payable by the Purchase on completion.” The sale was completed on 8 March 1991.
The plaintiff was registered for VAT in 1991, and was obliged to charge and account for VAT on any “taxable supply” it made. The sale of the phase 1 freehold was not a taxable supply, since the plaintiff had not exercised its statutory right to waive exemption (the “option” or “election” to tax). However, the sale of the freehold of phase II was a taxable supply, even in the absence of an election to tax, because it was a “new” building, and thus constituted an exception from the general exemption for the sale of freehold interests in commercial buildings. The plaintiff was therefore required to charge VAT on the taxable supply of phase II, and to account for the VAT so charged to Customs & Excise. Accordingly, the plaintiff paid £107,250, 15% of £715,000, on the basis that the consideration it had received from the defendant in respect of the sale of phase II was exclusive of VAT.
The plaintiff issued proceedings against the defendant claiming that the phase II consideration was VAT exclusive, and, accordingly, the defendant was liable to reimburse the plaintiff the £107,250 paid as VAT. The judge held that the words “Two million nine hundred and thirty five thousand pounds (£2,935,000) exclusive of Value Added Tax” provided for a consideration for the sale of the freehold of phase II inclusive of VAT, and, accordingly, the defendant was not liable to pay to the plaintiff any additional sum. The plaintiff appealed.
Held The appeal was allowed.
The matter depended on the proper construction of clause 2(a). It was clear that the second part of the clause provided a warranty that the plaintiff would not elect to charge VAT. If the only circumstance in which VAT were payable was where the plaintiff opted to elect to charge VAT, the words “exclusive of Value Added Tax” in the first part would be redundant, and, therefore, it was necessary to determine whether those words could be given any effect. This could be done by interpreting them as having the effect that if VAT were to be payable, the consideration paid was exclusive of VAT. Accordingly, the defendant was obliged to pay to the plaintiff the additional sum of £107,250.
Jonathan Peacock (instructed by Wragge & Co, of Birmingham) appeared for the plaintiff; Richard Bramwell QC (instructed by Enoch Evans, of Walsall) appeared for the defendant.
Thomas Elliott, barrister