Mr Moulsdale sold a let commercial property in 2014 without adding VAT, and HMRC later assessed him as if the price had included it. The difficulty was circular drafting in the land option-to-tax rules: they appeared to make VAT due only if he did not expect the buyer to pay it. The Supreme Court held that those rules cannot be switched on or off by the VAT treatment of the sale price itself, so his option to tax remained effective and his appeal failed.
Mr Moulsdale bought a building in Westfield, Cumbernauld, on 3 May 2001 for £1,140,000 excluding VAT. The seller had opted to tax the land and charged a further £199,500 in VAT. On 9 May 2001 Mr Moulsdale exercised his own option to tax and recovered almost all of that VAT. In September 2001 he let the building to Optical Express (Westfield) Ltd, a connected company running a VAT-exempt optician’s business, and charged VAT on the rent. A 2007 inspection established that he should not have done so: because the tenant was connected with him, the option was disapplied and the lease remained exempt.
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In early September 2014 he sold the building, subject to that lease, to Cumbernauld SPV Ltd for £1,149,374. The buyer was not connected with him, was not VAT-registered and had not opted to tax the land. Mr Moulsdale added no VAT. HMRC disagreed and assessed output VAT of £191,562, treating the stated price as already including VAT. His challenge failed in the First-tier Tribunal, the Upper Tribunal and, by a majority, the Inner House. Lord Doherty dissented.
The option to tax and the anti-avoidance rules
Supplies of land are ordinarily exempt. The supplier therefore charges no VAT, but also cannot recover the VAT paid on related costs. Schedule 10 to the Value Added Tax Act 1994 allows a person to opt to tax a particular parcel of land. While that option has effect, a grant of the land is taken outside the land exemption and VAT is chargeable.
Paragraphs 12 to 17 limit the benefit of the option. Without those rules, a business making exempt supplies could arrange a taxable property transaction to recover VAT on major expenditure, or spread the cost of tax that it could not recover directly.
Under paragraph 12, an opted grant is nevertheless not taxable if the grantor was a “developer of the land” and the “exempt land test” is met. The second condition was agreed to be met. Optical Express, a person connected with Mr Moulsdale, occupied the property for its exempt business, so the land was exempt land.
“Developer” had a special statutory meaning. It mattered whether Mr Moulsdale expected the building to become a qualifying capital item for the buyer. By 2014, the ten-year adjustment period on his own purchase had expired. No one expected the buyer to incur separate capital expenditure on the property.
How the circle arose
“Capital item” is defined by borrowing the Capital Goods Scheme in regulations 112 and 113 of the Value Added Tax Regulations 1995. That scheme lets a business adjust VAT recovered on expensive capital items if, within a set period, the balance of its taxable and exempt use changes. For land, the relevant expenditure is VAT-bearing acquisition expenditure of at least £250,000.
The building would therefore become a capital item for the buyer only if the buyer was intended or expected to pay VAT on an acquisition cost above that figure. The First-tier Tribunal found that no other relevant expenditure was intended or expected. Everything then depended on the VAT treatment of this very sale. If Mr Moulsdale expected the buyer to pay VAT, he was a developer, paragraph 12 switched the option off, and VAT was not due. If he did not expect that, he was not a developer, the option remained effective, and VAT was due. The circumstance controlling the rule was the very choice the rule was meant to determine. Lady Rose described this as a conundrum caused by provisions drafted for the Capital Goods Scheme being imported, by cross-reference, into a different anti-avoidance setting.
The competing ways out
Mr Moulsdale argued that the existing option meant he could expect to charge VAT. On his reading, that expectation was enough to make him a developer and disapply the option. He said the inquiry should stop there.
HMRC’s construction was narrower. In deciding whether this grant created the relevant capital item, the acquisition cost of the grant itself had to be ignored. The required intention or expectation had to concern some different VAT-bearing capital cost.
The lower tribunals and the Inner House majority had concentrated on what Mr Moulsdale actually expected. The Supreme Court approached the question differently. Knowing the VAT rules, misunderstanding them, or never having heard of them could not in itself determine whether tax was due.
The Supreme Court’s construction
The Court therefore had to choose between the rival constructions and preferred HMRC’s. For these provisions, the grantor’s intention or expectation must relate to some cost other than the expenditure whose VAT treatment paragraphs 12 and 13 are being used to decide. Paragraphs 12 to 17 exist to ensure that exempt businesses cannot recover input tax and to limit the advantage of opting to tax. They should be construed narrowly. Mr Moulsdale’s reading would let someone who had opted to tax, and taken the resulting advantage, switch the option off and make a cheaper exempt sale simply by intending to sell for more than £250,000. The Court agreed that this would defeat the provisions’ purpose, even though the sale was a genuine commercial transaction and the rules apply mechanistically, without any need to prove an avoidance motive.
The statutory word “developer” did not require building work. What mattered was the expenditure Parliament had defined. An expectation of separate qualifying expenditure could meet the test. An expectation that VAT would be payable on this particular price could not.
Verdict: The Supreme Court unanimously refused Mr Moulsdale’s appeal. The sale remained subject to VAT, and HMRC’s assessment of £191,562 stood.
