In D Moulsdale t/a Moulsdale Properties v HMRC [2019] UKUT 72 (TCC) (12 March), the UT held that the option to tax was not disapplied where there was no evidence that the appellant (who was the vendor) had any intention or expectation that the land in question would become a capital item.
VATA 1994 Sch 1 paras 12–17 (anti-avoidance) provide for conditions in which an existing option to tax is to be disapplied (i.e. VAT may not be charged on the supply). One such condition is that the land to which the supply relates:
(i) must be a capital item (within the meaning of the capital goods scheme in relation to the grantor; or
(ii) is expected or intended, in the eyes of the grantor or development financier, to become a capital item in relation to (a) the grantor or (b) the transferee.
It was common ground that (i) was not in point, but (ii)(b) was. The difficulty for the UT was that the anti-avoidance provisions contained a circular argument. If the grantor/development financier intended or expected the grant of the land to create a capital item in the hands of the transferee, the option to tax would be disapplied. But the effect of that disapplication was that a capital item would not be created, which would reapply the option, which would create a capital item, which would disapply the option, and so on ad infinitum.
The UT considered that the requirements of the legislation must be satisfied at the time of the grant. Such evidence as there was (namely that the appellant knew that the invoice issued would treat the grant as exempt) indicated that the appellant did not intend or expect the creation of a capital item. Consequently, the option to tax was not disapplied, and the grant of the land was taxable.
The UT was fortified in its decision by the earlier comments of the FTT to the effect that if, as proposed by the appellant, the process of determining whether a capital item would be created should halt once it is established that the grant would be exempt, the anti-avoidance aims of the legislation would, to a degree, be defeated.
Why it matters: This ‘circularity issue’ has been around for some time, to the extent that HMRC has created its own solution, namely: ‘the CGS item created by the transfer (and under the grant subject to the anti-avoidance test) is ignored for the purposes of deciding whether the grantor’s option is disapplied. As a result, the sale of the property is a taxable supply’ (HMRC manual VATLP23500)
The UT reached the same conclusion, but for reasons which were specific to this case.
In D Moulsdale t/a Moulsdale Properties v HMRC [2019] UKUT 72 (TCC) (12 March), the UT held that the option to tax was not disapplied where there was no evidence that the appellant (who was the vendor) had any intention or expectation that the land in question would become a capital item.
VATA 1994 Sch 1 paras 12–17 (anti-avoidance) provide for conditions in which an existing option to tax is to be disapplied (i.e. VAT may not be charged on the supply). One such condition is that the land to which the supply relates:
(i) must be a capital item (within the meaning of the capital goods scheme in relation to the grantor; or
(ii) is expected or intended, in the eyes of the grantor or development financier, to become a capital item in relation to (a) the grantor or (b) the transferee.
It was common ground that (i) was not in point, but (ii)(b) was. The difficulty for the UT was that the anti-avoidance provisions contained a circular argument. If the grantor/development financier intended or expected the grant of the land to create a capital item in the hands of the transferee, the option to tax would be disapplied. But the effect of that disapplication was that a capital item would not be created, which would reapply the option, which would create a capital item, which would disapply the option, and so on ad infinitum.
The UT considered that the requirements of the legislation must be satisfied at the time of the grant. Such evidence as there was (namely that the appellant knew that the invoice issued would treat the grant as exempt) indicated that the appellant did not intend or expect the creation of a capital item. Consequently, the option to tax was not disapplied, and the grant of the land was taxable.
The UT was fortified in its decision by the earlier comments of the FTT to the effect that if, as proposed by the appellant, the process of determining whether a capital item would be created should halt once it is established that the grant would be exempt, the anti-avoidance aims of the legislation would, to a degree, be defeated.
Why it matters: This ‘circularity issue’ has been around for some time, to the extent that HMRC has created its own solution, namely: ‘the CGS item created by the transfer (and under the grant subject to the anti-avoidance test) is ignored for the purposes of deciding whether the grantor’s option is disapplied. As a result, the sale of the property is a taxable supply’ (HMRC manual VATLP23500)
The UT reached the same conclusion, but for reasons which were specific to this case.
