The High Court held that there could be effective notification of an election to waive exemption from VAT after the disposal of land. Therefore the tribunal ([2006] BVC 4,038) was correct in concluding that there was a valid notification for the purposes of VATA 1994, Sch. 10, para. 3.

Facts

The appellant purchaser acquired a property on 21 January 2004 from the taxpayer seller. VAT was charged by the taxpayer on the sale to the purchaser, but it failed to notify Revenue and Customs (‘HMRC’) of its election to waive exemption from VAT until it submitted a completed Form VAT 1614 dated 20 February 2004 showing an effective election date of 31 October 1998. Although the taxpayer had no record of a formal election having been made, HMRC accepted the belated notification on the basis that VAT was accounted for on the letting of a small part of the building to an associated company and that VAT was charged on the ultimate sale to the purchaser.

The purchaser challenged that decision, claiming that no election had been made by the taxpayer prior to its disposal of the property. It pointed to pre-contract correspondence between the parties’ solicitors prior to the sale in which the taxpayer's solicitor stated that no election to waive exemption had been made. The taxpayer's later position was that a ‘deemed election’ had been made, in accordance with the decision in Fencing Supplies Ltd ( [1993] BVC 987; Decision No. 10,451) because it had charged and accounted for VAT on the rent.

The VAT tribunal held that, notwithstanding the failure of the taxpayer to notify HMRC of its election to waive exemption, it had made the necessary election in relation to the property with effect from 31 October 1998. The required notification was given almost six years later and was accepted by HMRC as a belated notification of the earlier election ([2006] BVC 4,038; Decision No. 19,326). The purchaser appealed to the High Court.

Issues

Whether, on the facts, there had been a valid election; and, even if there had been a valid election, whether notification of the election in February 2004 was capable of operating retrospectively so as to make the sale to the purchaser one which was subject to VAT.

Decision

Mann J (dismissing the appeal) said that an election to waive exemption from VAT involved a two stage process. The first stage was an election under VATA 1994, Sch. 10, para. 2. There was no provision as to how that election was to be made. It was not apparent any formality was required. What must be required, in accordance with the normal principles of acts said to be an election, was a sufficiently clear indication of intention which was sufficiently manifested or (so far as required) communicated. The second phase was notification which took place under para. 3(6). Thus an election could take place without its being communicated to the Revenue.

The Fencing Supplies case had been decided in 1993, based on events on 1991 when the notification step was not required for transactions of that nature. In that case, the only act which was said to amount to an election was the charging of VAT on rent. There was evidence that that was done because the taxpayer thought it had to do it. There was apparently no evidence that it was actually done with the conscious intention of electing into the VAT regime. Notwithstanding that, the VAT tribunal held that there had been an election.

In favour of there having been an election in the present case, there was the positive decision to charge VAT on rent, and the charging of that VAT and accounting to HMCE for it. In addition, there was the claiming of input tax as referred to in the decision. All those acts were consistent with a desire to bring the property within the VAT regime and to claim to take it out of the exemption. Against that was the equivocation recorded in the conveyancing correspondence. It was apparent that at the time of the conveyancing the basis on which VAT had been charged on rent was not clear. It was for the tribunal to weigh that evidence.

There was material on which the tribunal was entitled to reach the conclusion that it did, namely that there had been an election. It did not manifestly err in reaching that conclusion; it did not omit any relevant consideration; and it did not manifestly err in failing to find that Fencing Supplies was wrongly decided.

Even if it were wrongly decided, there was different material in the present case. There was no equivalent evidence in the present case to the evidence in Fencing Supplies that the VAT was charged because the company thought it had to charge it without giving any thought as to why. There was also the additional claiming of input tax. While the subsequent correspondence did indicate there was some uncertainty as to what was going on, the ultimate decision to seek to impose VAT on the sale was consistent with an election.

Under VATA 1994, Sch. 10, para. 3(1) an election ‘shall have effect’ from the beginning of the day on which it was made (or any later date specified in the election). Under para. 2(1) it then governed any grant made ‘at a time when the election has effect’. Those provisions were quite clear. A grant made after an election had had effect fell within the VAT regime. Paragraph 3(6) provided a qualification – an lection could only have effect once notification was given. It was quite clear from that paragraph that notification could be given after the election. Paragraph 3(6)(ii) allowed for a period of 30 days to give the notification. If one read the provisions together, they operated so as to effect a form of retrospection. If one had an election on day 1, a chargeable output on day 3 and the incurring of a chargeable input on day 5, and stopped the clock at that point, the election to take the property out of the exemption had not yet had any effect for fiscal purposes. However, if notification occurred on day 8 then the effect of the notification was to complete the effect of the election, with effect from the beginning of day 1. Accordingly, at that point, the events of days 3 and 5 became events which were subject to the VAT regime.

No particular problem arose if the supply on day 3 was one which did not involve disposing of the land – for example a charge to rent. The mechanism provided by the UK legislation was clear enough. It inevitably built in an element of retrospection. There was no reason why that element should be different, depending on the nature of the taxable supply on day 3. It would not infringe the principle of certainty to hold that the process of notification was capable of completing the effect of the election in respect of previous transactions. So far as the taxpayer was concerned, it had a fortiori made an election, had entered into the transaction in question on the terms which it had agreed and then decided to notify, all of which were matters of choice. It knew at all times the terms of the transaction and the fiscal consequences of its acts which were certain. The position of the purchaser would be fixed by the terms of the bargain pursuant to which the supply on day 3 was made. If the bargain included the payment of VAT on top of a specified consideration, then that was the bargain and it was certain. If the consideration did not expressly include VAT, then VATA 1994, s. 19(2) prevented the recovery of any additional sums in respect of VAT once the notification was made.

Article 13(C) gave a discretion to allow ‘taxpayers’ a right to elect for taxation in respect of land transactions. The expression ‘taxpayers’ was not defined, and there was nothing in the wording of art. 13(C) which suggested that that person must be an actual landowner at any particular moment. All that he, she or it had to be was a ‘taxpayer’, and that was not an inapt description of someone in the position of the seller before, at the moment of and after the sale of the land. While ‘taxpayer’ was not defined, ‘taxable person’ was defined in art. 4 as ‘any person who independently carries out in any place any economic activity specified in paragraph 2 ’ which was apt to describe the taxpayer at all three points of time. Accordingly, there was nothing in the opening words of art. 13(C) which circumscribed the person with the right of option and rendered ineffective a notification of election made after the disposal of the land in question.

Chancery Division. Judgment delivered
30 June 2006.