David Moulsdale, trading as Moulsdale Properties, argued that the sale had fallen within an exception under Schedule 10 of the Value Added Tax Act 1994 (VATA), and thus he was not accountable for any VAT. He had previously exercised an option under VATA in order to claim back tax paid to the party he had purchased the building from.

The appeal was heard by the President of the Supreme Court, Lord Reed, along with Lord Briggs, Lord Sales, Lord Hamblen, and Lady Rose. Philip Simpson KC and David Small appeared for the appellant and David Thomson KC, Elisabeth Roxburgh, and Ross Anderson for the respondent.

Treated as developer

In May 2001, the appellant purchased a building in Westfield, Cumbernauld, for £1.14 million. The seller of the land had exercised the option under VATA to tax the land, and the appellant himself exercised the same option to claim back almost all of the VAT he paid to the vendor. The property was then let to Optical Express, a VAT-exempt business, and in 2007 the appellant was told that he ought not to have charged VAT on the rent as the lease fell within the class of transactions on which the option to charge VAT was disapplied.

The appellant sold the property subject to the lease to Cumbernauld SPV, a company unconnected to him that was not VAT registered, in 2014. Cumbernauld SPV did not notify HMRC that it was exercising the option to tax the land. No VAT was charged on the sale based on advice received by the appellant that the transaction fell into an exception in Schedule 10 of the 1994 Act. HMRC disagreed, and assessed him for output VAT of £191,562 as if the sale price of the land included VAT.

An unsuccessful attempt was made to challenge HMRC’s decision before the First-tier Tribunal, with further unsuccessful appeals made as far as the Inner House of the Court of Session. It was argued for the appellant that, because he had exercised the option to tax in relation to the land, he would ordinarily expect that Cumbernauld SPV would pay VAT on the purchase price. Because of that expectation, he should be treated as developer of the land and the grant as tax exempt.

For HMRC it was submitted that the relevant intention or expectation as to whether the purchaser would pay VAT on a capital expense in relation to the building must be an intention or expectation about incurring VAT on a capital item different from the actual price of the building itself. This was not present in the circumstances of the sale, in which there was no doubt that the purpose of the transaction was to pay the appellant for the building.

Narrow construction

In a judgment with which the other four judges agreed, Lady Rose began: “With respect to the tribunals below and the majority of the Inner House, I do not agree that evidence - or the absence of evidence - from a taxpayer about how he or she thought that the statutory provisions would apply to the grant is the key to deciding this case. The taxpayer may have a good understanding of the law and may be well advised or may be unaware of the existence of Schedule 10. That does not affect how the provisions do apply or whether the grant is subject to VAT.”

Assessing the competing constructions of the 1994 Act, she said: “The court’s task in this appeal is to construe para 13 of Schedule 10 in its context so as to give effect to the purpose for which para 13, as part of paras 12 to 17 of Schedule 10, was enacted. I therefore agree that one must start, as HMRC submit, with the principle that Schedule 10 is aimed at ensuring that exempt businesses cannot recover input tax.”

She continued: “The problem with [the appellant’s] construction is that it allows the taxpayer who has taken advantage of exercising the option to tax its land so as to claim input tax credits or to spread payments of irrecoverable input tax then to switch off the option to tax and make a cheaper, VAT exempt sale to a non-taxable purchaser simply by intending or expecting to sell the land or building for more than £250,000.”

Noting that the dispute had arisen because of a circularity issue in the drafting of VATA, Lady Rose said: “Although the drafting of this legislation is unfortunate, the obvious purpose of the provisions would be defeated if they had the effect of rendering a normal commercial transaction such as this one exempt in circumstances where the owner of the land had, presumably for its own advantage, previously opted to waive the exemption and tax transactions relating to the land.”

She concluded: “An additional pointer towards HMRC’s construction is that paras 12 to 17 are intended to limit the right conferred on taxpayers to opt to treat their land as generating taxable rather than exempt supplies, when it is to their advantage to do so. These anti-avoidance provisions erode that entitlement and so should be narrowly rather than broadly construed. It is true that a curiosity of this case is that it is Mr Moulsdale rather than HMRC who is arguing that the anti-avoidance provisions should be broadly construed so as to disentitle Mr Moulsdale’s reliance on the option to tax which he has exercised. But that should not stand in the way of the narrow construction.”

The Supreme Court therefore refused the appeal.