Foreign Property APS v Secretary of State for Health

Under the Value Added Tax Act 1994, a lease may disapply the statutory rule that VAT increases the consideration only through a contractual provision specifically referring to VAT or the statutory provision. A clause stating that no additional VAT is payable until the landlord supplies specified documents may qualify the tenant’s VAT covenant. On its proper construction, late supply of the documents does not revive liability for VAT on earlier rent. The lease must be read as a whole, in its commercial context and with regard to business common sense. A general outgoings clause does not create a separate VAT liability where a specific VAT clause governs.

The landlord, as assignee of the reversion, claimed £26,929.54 from the Secretary of State for VAT on rent under a 1990 lease. The landlord elected to waive exemption on 10 May 1999 but supplied the lease-required notification and registration documents only about a year later.

The Mayor’s and City of London Court dismissed the claim. The issue on appeal was whether the lease merely postponed the tenant’s liability for VAT until the documents were supplied, or extinguished liability for the period before their supply.

Appeal dismissed unanimously. Lord Justice Laws delivered the leading judgment, with which Lady Justice Arden and Lord Justice Simon Brown agreed.

1. The Value Added Tax Act 1994 ordinarily increases the consideration for a supply when VAT becomes chargeable after the contract is made. Under section 89, a lease displaces that rule only where it contains an appropriate contrary provision specifically referring to VAT or section 89.
2. Clause 3(31), read in its contractual context, would ordinarily require the tenant to pay VAT to the landlord in addition to rent. Clause 5(10)(i) was a proviso qualifying that covenant. Its effect was that no VAT was payable on rent during the period in which the landlord had failed to provide the specified documents. Once the documents were supplied late, clause 3(31) imposed no liability for the earlier period. Clause 5(10) therefore displaced the statutory liability under section 89 rather than merely deferring it.
3. Clause 3(2)(A) did not assist the landlord. It was a general outgoings provision, and its reference to VAT prevented an argument that it relieved the tenant from a VAT obligation; it did not impose a freestanding obligation applicable independently of clause 3(31).
4. The lease was construed by reference to its language, the lease as a whole, the commercial background and business common sense, applying the approach discussed in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896. The possibility of a substantial unexpected late demand, the landlord’s failure to comply with its own obligation, and the requirement in clause 5(10)(ii) for a VAT invoice within three days of receiving rent all supported the tenant’s construction.
5. The appeal was dismissed with costs assessed at £4,606.35.

• Court of Appeal (Civil Division). On 8 October 2003, the court dismissed the appeal and ordered costs of £4,606.35.
• Mayor’s and City of London Court. His Honour Judge Simpson dismissed the landlord’s claim on 28 October 2002.