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TaxationWeb by Andrew Needham

Andrew Needham, Director of VAT Solutions (UK) Ltd, reports on a case concerning the validity of a VAT charge on a property disposal.

Background

The background is the purchase by the appellant of a property from a company named NS, and a subsequent challenge to the validity of the charge of VAT by NS. The appellant was not registered for VAT.

The relevant events were:

• NS, a fully taxable entity, purchased the property in September 1998


• in October 1998, NS let part of the property to an associate and decided to charge VAT on the rent (whether that was an exercise of the option is one of the points at issue)


• VAT was accounted for on all quarterly rents to the associate from October 1998


• in January 2004 NS sold the property to the appellant


• in February 2004, the finance director of NS wrote to HMRC enclosing a notification of option form 1614 with an effective date of October 1998 and HMRC acknowledged acceptance of the notification

Valid notification?

Before the VAT Tribunal the appellant argued first that the notification was invalid as NS had ceased to have any interest in the property by the date of the notification. Tribunal Chairman (Oliver) rejected this argument, noting that the overall scheme of the option regime, introduced in line with Article 13C, clearly envisaged scenarios where the option to tax would be notified by a taxpayer after disposing of the interest in the property (albeit not usually with the time gap of 5 Years 8 months as here). The appellant argued secondly that NS had not in fact exercised the option to tax in October 1998. This argument revolved largely around statements made between the parties and their representatives at the time of the sale in January 2004. The Tribunal Chairman was satisfied that NS had acted lawfully in exercising the option to tax in October 1998, albeit failing to notify the election to HMRC within the prescribed 30 days.

Tribunal decision

When the notification was eventually made, HMRC had properly exercised a decision to accept it as a belated notification. The Tribunal dismissed the appeal.

Appeal

The High Court Judge initially raised the point that, whilst the appellant had a right to bring the appeal as the recipient of the supply on which VAT was charged, a decision in its favour would actually affect NS. However, the Judge expressed satisfaction that NS had been given an opportunity to participate in the proceedings, which it had declined. In view of this, he was happy that the hearing should proceed.

Counsel for the appellant pursued two lines of argument, similar to those in the Tribunal.

First, it was argued that there was no valid election in September 1998 and that the Tribunal had erred in holding that there was. The Tribunal had relied upon an earlier case which was wrongly decided, and that the act of opting to tax required a demonstrable act of opting and could not be deemed to have taken place merely by reference to the subsequent charging of VAT. The Judge rejected these arguments.

Secondly, Counsel argued that a notification of an election could not take place after the taxpayer had disposed of the land in question. Counsel's arguments were based around comments in a number of cases that taxpayers must have legal certainty in their tax affairs and that there would not be legal certainty on a transaction if its VAT status were dependent upon a subsequent act of notification by NS.

High Court decision

The Judge was not convinced by this line of argument and noted that the wording of Article 13C did not impose the restrictions which Counsel was suggesting. The Judge rejected these arguments and concluded that there is nothing which renders ineffective a notification of election after the disposal of the land in question.

The Judge said the Tribunal was entitled to reach the conclusions it did and dismissed the appeal.

Marlow Gardner & Cooke Limited Directors Pension Scheme v HMRC – High Court, 30 June 2006

Andrew Needham
Director, VAT Solutions (UK) Ltd
July 2006

VAT Solutions (UK) Ltd
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VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via their website