Moulsdale t/a Moulsdale Properties v Commissioners for His Majesty’s Revenue and Customs (Scotland)

When determining whether the option to tax land is disapplied under paragraphs 12 and 13 of Schedule 10 to the Value Added Tax Act 1994, the grantor’s intention or expectation of VAT-bearing capital expenditure must concern expenditure other than the acquisition cost whose VAT treatment is itself being determined.

A taxpayer’s knowledge or understanding of the statutory scheme does not affect the tax consequences. The statutory references to intention and expectation concern intended facts, such as future qualifying expenditure. They do not require evidence about the taxpayer’s view of the law. The anti-avoidance provisions restrict the option to tax and should be construed narrowly in accordance with their purpose.

The appellant had opted to tax a commercial property and had recovered input VAT paid on its acquisition. He later sold the property, subject to a lease used for an exempt business, without charging VAT. HMRC assessed output VAT of £191,562, treating the agreed price as VAT-inclusive.

The First-tier Tribunal dismissed his appeal: [2018] UKFTT 309 (TC). The Upper Tribunal dismissed a further appeal: [2019] UKUT 72 (TCC), [2020] STC 796. A majority of the Inner House also dismissed the appeal: [2021] CSIH 29, [2021] STC 1077.

The central issue was how to resolve the circularity created by paragraphs 12 and 13 of Schedule 10 to the Value Added Tax Act 1994. If VAT on the acquisition price were expected, the option appeared to be disapplied; if VAT were not expected, the option appeared to remain effective.

1. Appeal dismissed unanimously. Lady Rose delivered the judgment, with which Lord Reed, Lord Briggs, Lord Sales and Lord Hamblen agreed. The appeal was dismissed for reasons different from those given by the Inner House.

2. The taxpayer’s evidence, or absence of evidence, about how he thought the statutory provisions applied was not decisive. Liability could not depend upon whether the grantor understood Schedule 10, was well advised or was unaware of the statutory scheme. Such a construction would produce capricious results. The relevant provisions apply consistently irrespective of the grantor’s knowledge of the law.

3. The subjective intention or expectation required by paragraph 13 may nevertheless raise a factual issue. Where the alleged VAT-bearing expenditure consists of later refurbishment or other qualifying costs, the tribunal must determine whether the grantor actually intended or expected those works and costs. Here there was no comparable factual dispute. Both parties intended and expected that the purchaser would pay the acquisition price, and no other VAT-bearing capital expenditure was contemplated.

4. Paragraphs 12 and 13 must be construed so that the grantor’s intention or expectation concerns VAT-bearing expenditure on a capital item other than the expenditure whose liability to VAT is being determined under those same provisions. The acquisition price in the grant under examination must therefore be disregarded. Otherwise, the provisions generate the circular result that charging VAT makes the transaction exempt, while not charging VAT makes it taxable.

5. This construction gave effect to the purpose of paragraphs 12 to 17. Those provisions prevent exempt businesses from recovering input tax through manipulation of the option to tax. They limit a taxpayer’s right to opt for taxation and should therefore be construed narrowly. The appellant’s construction would permit a person who had benefited from the option to tax to switch it off and make a cheaper exempt sale merely because the price exceeded £250,000.

6. The possibility that the construction left part of paragraph 13 with little present application did not justify the contrary result. The primary legislation incorporates a regulatory definition capable of changing as the Capital Goods Scheme develops. Accordingly, the appellant was not a developer of the land within paragraph 12, the option to tax remained effective, and the sale was subject to VAT.

1. United Kingdom Supreme Court: Dismissed the appeal unanimously, affirming the result below for different reasons: [2023] UKSC 12.
2. Court of Session, Inner House: Dismissed the appeal by a majority, Lord Doherty dissenting: [2021] CSIH 29, [2021] STC 1077.
3. Upper Tribunal: Dismissed the appeal from the First-tier Tribunal: [2019] UKUT 72 (TCC), [2020] STC 796.
4. First-tier Tribunal: Dismissed the taxpayer’s appeal against HMRC’s VAT assessment: [2018] UKFTT 309 (TC).