Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2009] CSOH 131
	OPINION OF LORD WOOLMAN in the Petition of ARGYLL HOUSE DEVELOPMENTS Petitioners; for Judicial Review ­­­­­­­­­­­­­­­­­________________

Petitioners: Logan; Campbell Smith

Respondents: Mrs Wolffe, Q.C., Shepherd & Wedderburn, LLP

24 September 2009

Introduction

[1] The petitioner was incorporated on 12 September 2006 with a view to developing a retail site at West Port in Dundee. From 2006 onwards, it incurred various expenditure in respect of the development. However, it only registered for VAT from 1 August 2007. Subsequently, the petitioner applied to reclaim VAT input tax in respect of its expenditure on the development since 2006. Her Majesty's Commissioners of Revenue and Customs ("HMRC") restricted the input tax recoverable. They only allowed recovery of sums incurred in the six month period prior to the petitioner's registration.

[2] The petitioner now seeks to recover the disallowed element, which amounts to £16,692.26. It founds its claim on an extra statutory concession contained in HMRC Public Notice 742A. That indicates that in certain circumstances, input tax may be recovered beyond the six month cut-off point. HMRC maintain that the concession does not apply to the petitioner.

[3] The VAT Tribunal has no jurisdiction to review decisions about the application of extra statutory concessions. Accordingly, the petitioner has brought the present petition for judicial review. It challenges the decision by HMRC to refuse the balance of its claim on the basis that HMRC acted irrationally in holding that the extra statutory concession was inapplicable. The petitioner also maintains that the concession gave rise to a legitimate expectation that the input tax was recoverable.

The Legislative Framework

[4] The principal United Kingdom legislation is contained in the Value Added Tax Act 1994 and the VAT Regulations 1995 (SI 1195/2518). Their respective provisions implement various European Council Directives on the common system of Value Added Tax. The four key elements of VAT are well known. First, it is a tax imposed on the supply of goods and services by a business: 1994 Act, section 1. Secondly, before VAT arises, there must be a taxable person and a taxable supply: section 4. Thirdly, a taxable person is someone who is, or requires to be, registered for VAT: section 3. Fourthly, at the end of each accounting period, the taxable person must pay the difference between his output tax and his allowable input tax: section 25. Output tax relates to supplies made by a taxable person. Input tax comprises supplies made to him: section 24.

[5] For present purposes, it is important to note that a taxable supply is a supply of goods or services, other than an exempt supply: section 4 (2). Where a business makes an exempt supply, no VAT is charged. It follows that someone who is not registered for VAT cannot properly speak of inputs or outputs. Complex rules apply to commercial land and buildings. They may fall into the exempt category: section 31 and Schedule 9 (Group 1). Where they do so, it is open to the taxpayer to waive the exemption: Schedule 10. In other words, the taxpayer can elect to render its supplies taxable. The advantage of this "opt to tax" is that it allows input tax to be reclaimed.

[6] The 1995 Regulations contain provisions that cover persons who switch between making taxable and exempt supplies. Where a taxable person changes his intention from making standard rated to exempt supplies, HMRC can claw back input tax already claimed for a maximum period of six years: Regulation 108. Similarly, if the taxable person changes his intention from making exempt to taxable supplies, he can seek to recover the input tax for the same period: Regulation 109. In each case, the six year adjustment period only applies during the time when the taxable person was registered. It is therefore of little benefit to newly registered persons.

[7] There is a further provision that directly assists such persons. They can make an exceptional claim for relief in respect of pre-registration supplies. HMRC may "treat as if it were input tax" the VAT which has been incurred prior to registration: Regulation 111. Such a claim must be made on the first return the taxable person is required to make. It cannot be made at any later point, unless HMRC otherwise allows: Reg. 111 (3).

[8] However, there is a time limit for such claims. Relief is not available in respect of services supplied to the taxable person "more than 6 months before the date with effect from which the taxable person was, or was required to be, registered": Reg. 111 (2) (d). It was on that basis that HMRC allowed part of the petitioner's claim in this case. The time limit for goods is longer. Claims in respect of goods can be made for a period of up to three years prior to registration: Reg. 111 (2) (b).

[9] The extra statutory concession relied upon by the petitioner is contained in Public Notice 742A. It was issued in March 2002 and re-issued in June 2008. The relevant section states:

"9.4 What about the VAT I incurred prior to my registration?

You may find that you become registered for VAT as a result of opting to tax. Special rules apply to all newly registered persons under which they may be entitled to claim relief for VAT incurred on supplies they obtained before registration. Relief is restricted on supplies of services to those received not more than 6 months before your registration. This restriction may lead to inequitable treatment compared with a business carrying out similar activities, but who was already VAT registered when the tax was incurred. If you consider you have suffered because of this you should write to your local tax office and explain your circumstances. In all cases relief for VAT incurred before registration is restricted to tax which can be directly attributed to a taxable activity. If you incurred tax before registration that was attributable both to exempt supplies before registration as well as taxable supplies after registration, the relief will be restricted proportionately."

[10] HMRC guidance on the matter is also to be found in "V-13 Input Tax". That guidance is principally intended for internal use, but it is published on the internet and therefore available to taxpayers and their advisers. It states:

"A strict application of the Regulation [111] would therefore mean that a newly registered person was not treated equally with a person who was registered when the tax was incurred. It is accepted that this is an anomaly and we will consider granting extra statutory remission in suitable cases."

The Petitioner's VAT History

[11] When the petitioner applied to register for VAT, it completed and sent the prescribed form (VAT 1) to HMRC. The form contained the following information:

a)     The petitioner's main activities would be property management and property development.

b)     It sought voluntary registration, as its turnover would be below the registration threshold.

c)     It intended to make taxable supplies in the future.

d)     It did not expect the VAT on its purchases to regularly exceed its taxable supplies.

[12] On receipt of the form, HMRC sent a standard "request for information" letter to the petitioner, enclosing two further documents: (i) a property questionnaire; and (ii) Form V1614, which is headed "Option to Tax Land and/or Buildings (Election to Waive Exemption) Notification Form". The letter stated that the information was required "so that your liability to be registered for VAT and the appropriate date of registration can be determined".

[13] The questionnaire contained a number of questions and the following statement:

"*The sale of commercial property over three years old and the letting of commercial property are EXEMPT supplies. To make these supplies taxable, so that you can charge VAT and also recover input tax in relation to the property, you will need to exercise an option to tax. If you wish to do this please complete and return the enclosed form VAT 1614."

[14] The questionnaire was returned by the petitioner on 3 October 2007. It was completed and signed on its behalf by one of its directors, Lawrence Duncan. In the reply section of the completed questionnaire, the petitioner indicated (a) that its intention was to develop the property for sale; (b) that it expected to make its first taxable supply on 1 October 2006; and (c) that the expected completion date of the development was 1 January 2009.

[15] Form V1614 contains a box at the top of the form, which states "Attention - complete this form only to notify your decision to opt to tax land and /or buildings. Before completion, it is strongly recommended that you read VAT notice 742A (Opting to tax land and buildings) ..." No completed form was returned by the petitioner in October 2007. Its reply to HMRC contains the handwritten words "not applicable in this case", which apparently refer to the V1614 form.

[16] On 9 January 2008, the petitioner sent a completed Form V1614 to HMRC. It stated that it wished to opt to tax from 1 January 2008 and that it had made no exempt supplies. It did not provide any further information about its intentions in relation to the subjects. HMRC acknowledged receipt of the application on 25 January 2008.

[17] The petitioner also lodged a VAT return for the period ending November 2007. It sought to recover VAT input tax of £23,683.16 dating back to 31 July 2006. On 11 January 2008, HMRC wrote to inform the petitioner that they would only allow £6,990.90 by way of recoverable input tax. They disallowed the balance as comprising "invoices for services provided more than 6 months prior to the effective date of registration".

[18] On 14 January 2008, the petitioner wrote to appeal HMRC's decision. The author of the letter was again Mr Duncan, who stated:

"Our company was formed to develop the site known as the Westport Site in the Centre of Dundee. I was under the impression that VAT incurred in the furtherance of our business for 3 years prior to registration would be recoverable. However, it now transpires that there is a further restriction of services in that these are restricted to a six month period.

While this may be the case in normal businesses, I think in one that relates to property, it causes a distortion. The road to obtaining Planning and Building Consents can take up to 3 to 5 years in large projects. We are in the process of Option to Tax the development site, as the cost of this development will in excess of £11m (see attached costing). It is therefore unfair as we will be charging VAT on a property but being unable to reclaim the input tax that is directly attributable to its Conception and Construction.

I would submit that the above brings out an anomaly and I would request you consider granting an extra statutory remission in this case."

Mr Duncan's misapprehension about the relevant period being three years may stem from the different periods which apply to goods and services.

[19] On 19 March 2008, HMRC replied to the petitioner. Under reference to Regulation 111, they stated:

"Unfortunately there is no extra statutory concession which covers the type of transaction detailed in your letter i.e. costs incurred by building companies in the lead up to the commencement of a development, which may have been incurred several years before, due to delays in obtaining planning and building consents".

[20] It was perhaps unfortunate that HMRC did not mention the existence of Public Notice 742A at that stage. However, in an attempt to be helpful, the author of the HMRC letter went on to mention the possibility of the petitioner's registration being backdated. Not surprisingly, that suggestion was quickly followed up. On 21 March 2008, the petitioner applied to backdate its registration to 1 July 2006. Almost equally quickly, the application was refused. By letter dated 4 April 2008, HMRC informed the petitioner that such a backdating would only occur if (a) there had been a departmental error during the registration process; or (b) information came to light to indicate that the taxpayer was liable to be registered from an earlier date.

[21] That was not, however, the end of HMRC's efforts to find a solution to the problem. On 17 April 2008, they wrote to the petitioner and suggested that its appeal be sisted while a different route was explored. The letter referred to the question of remission in terms of paragraph 9.4 of Public Notice 742 and stated:

"The decision on remission lies with our VAT Policy Team as stated in HMRC internal guidance - paragraph 6.9 of V1 13 (which is available at www.hmrc.gov.uk). In order that VAT Policy Team can fully consider your case, I need to provide them with information relating to your development. To this end, I would seek clarification on a few matters."

The letter continued by asking the petitioner two questions: (a) whether it would seek to disapply the option to tax for any part of development; and (b) what was its intended use of the building. The petitioner replied by fax on 21 April 2008 confirming that the option to tax would not be disapplied. Much more importantly, it also stated that its intention was to lease out the property on its completion.

[22] The Appeals Unit of HMRC wrote again to the petitioner on 9 June 2009 ('the Decision letter'). After narrating the background to the claim and confirming that the author had contacted the VAT Policy Team, it was stated that the appeal was refused. The reason for the refusal was given as follows:

"... remission for Pre registration Regulation 111 input tax is only offered as a result of opting to tax. This condition does not apply here. The concession recognises that traders who do not register until they opt for tax are sometimes at a disadvantage in comparison with traders who are already registered when they start to incur VAT in relation to a property, and who opt to tax at a later date. The aim of the concession is to place "newly registered" traders on a similar footing to traders registered at the time they incurred input tax. This principle of equality of treatment underpins the concession."

Reference was also made to the fact that in numerous cases, the VAT Tribunal had refused to allow input tax incurred for services more than 6 months prior to registration.

The Petitioner's Submissions

[23] Various arguments were marshalled by counsel for the petitioner in submitting that its position fell within the extra statutory concession:

a)     Tax payers and their advisors are entitled to rely upon the concession in ordering their affairs.

b)     Its aim is to avoid prejudice to a person who is not registered.

c)     Specifically, it is designed to place a newly registered trader on a similar footing to a trader who was registered at the time he incurred the input tax.

d)     The petitioner had spent substantial sums in developing the site, at a time when no rent was being received. Accordingly, it had gained no advantage from the delay in opting to tax.

e)     There was no necessary coincidence between registration and the application to opt for tax.

f)       If the concession was only available to those who registered as a consequence of opting to tax, few persons would benefit.

g)     It would be unfair discriminatory and offend the principle of fiscal neutrality not to allow remission to the petitioner: Turn und Sportunion Waldburg (CJEC Case C-246/04).

h)     A high standard of conduct was expected of HMRC in all its dealings: Al Fayed v Inland Revenue Commissioners 2006 STC 270.

At its core, the petitioner's submission was that it should be placed in the same position as if it had been registered for VAT from the date that it first incurred expenditure on the development.

Discussion

[24] Extra statutory concessions facilitate the workings of the taxation system. They are part of the discretion "which enables the commissioners to formulate policy in the interstices of the tax legislation, dealing pragmatically with minor or transitory anomalies, cases of hardship at the margins or cases in which a statutory rule is difficult to formulate or its enactment would take up a disproportionate amount of parliamentary time": R (Wilkinson) v IRC [2005] 1WLR 1718, 1724 per Lord Hoffmann.

[25] With regard to the proper approach to extra statutory concessions, Collins J. has provided the following helpful observations:

"13. ... It is a pity that the trenchant aphorism of Walton J in Vestey v IRC [1979] 1 Ch. 177 at 197: 'One should be taxed by law, and not be untaxed by concession' has not been heeded. Concessions lead not only to artificiality and false documentation but also to arguments whether particular transactions fall within them. The language of concession is not that of a statute and should not be construed as if it was. But if a concession is published to all who might benefit from it, they are entitled to arrange their affairs in reliance on it, provided that what they do falls clearly within the terms of the concession. As Bingham LJ said in a leading case relating to legitimate expectation arising from concessions, R v IRC ex parte MFK (1989) S.T.C. 873 at 892d:-

The taxpayer's only legitimate expectation is, prima facie, that he will be taxed according to statute, not concession or a wrong view of the law ... No doubt a statement formally published by the Revenue to the world might safely be regarded as binding subject to its terms, in any case falling clearly within them.

....

23. I am prepared to accept that, since the Commissioners are relieving a taxable person of a liability imposed by law ... the taxable person must demonstrate that he has acted strictly in accordance with what the concession permits and has complied with all the conditions necessary to obtain the relief. Any doubt should be resolved in favour of the tax being payable according to the statutory provision since, if there is doubt, or the language of the concession is ambiguous, the taxpayer should inquire of the Commissioners whether what he intends to do falls within the concession."

In the Application of Greenwich Property Ltd. v The Commissioners of Customs & Excise [2001] STC 618

[26] In my view, the critical words in paragraph 9.4 are "as a result of opting to tax" in the opening sentence. If they had been absent, then in my view the petitioner would have fallen within the ambit of the concession. But the fact that the phrase is there presents a clear difficulty for the petitioner's argument. Giving the words their ordinary meaning, they insert a condition. The concession is only to apply to those persons which require to register because of their election. In this case that condition was not satisfied. The petitioner had already registered for VAT. Its registration was not triggered by the opt to tax.

[27] In determining whether that is a reasonable construction, it is appropriate to look to the purpose of the extra statutory concession. I agree with senior counsel for the respondent that it seeks to equate the position of two categories of trader. The first category comprises those who were compelled to register because of their exercise of the option. Into the second category fall those traders who opt to tax, but were already registered. Traders in this second category may have up to six years' worth of potential adjustment of input tax. In the absence of the concession, they would be in a much better position than traders in the first category. Accordingly, in my view both the literal and the purposive construction point against the petitioner's argument.

[28] In this case the petitioner had to take two discrete decisions: (a) whether to register for VAT, and (b) whether to opt for tax. Each decision was an important one. The first determined the VAT regime to which the petitioner would be subject. The second decision determined whether it would move from making exempt to taxable supplies. As indicated above, the petitioner appears to have mistaken the period for which input tax on services could be reclaimed. It thought it was three years rather than six months.

[29] But it also made a further error, which is highlighted in paragraph 4 of the petition: "The petitioner gained no advantage from the intervening period. They were not aware that applying for registration and opting to tax on different days had any significance." In my view the petitioner is the author of its own misfortune. The information supplied by HMRC at the time of registration was clear and straightforward. It is difficult to know what more HMRC could have done to bring home to the petitioner the importance of the decisions that it had to take. Against that background, there is no basis for relieving the petitioner of the tax consequences of its own decisions. This is simply a "wrong view of the law".

[30] During the course of his submissions, counsel for the petitioner submitted that it was evident that it intended to opt to tax from the outset. As I understood it, the thrust of this argument was that in the circumstances of this case, the distinction between the decision to register and the decision to opt to tax should be collapsed. I am, however, unable to discern such an intention on the part of the petitioner. In my view, the information it supplied to HMRC at the time of registration points in the opposite direction. If it had intended to lease the subjects in August 2007, it should have completed the option to tax form to recover its input tax. Counsel for the petitioner fairly conceded that a reasonable person could have thought that its intentions regarding the development had changed between August 2007 and January 2008.

Irrationality & Legitimate Expectation

[31] In the light of the above discussion, I am able to deal with the two grounds of challenge in very short compass. In my view the decision under challenge cannot be said to be irrational. HMRC were entitled to hold that the petitioner's claim did not fall within the terms of the extra statutory concession. On a proper construction, it was open to them to hold that the remission was only for traders who registered as a result of an election to opt to tax. Even if it could be said that there was any scope for a different construction to be adopted, it was a decision within the range of acceptable decisions open to them. It cannot therefore be characterised as perverse: Puhlhofer v Hillingdon London Borough Council [1986] 1AC 484, 518 per Lord Brightman.

[32] If the petitioner does not fall within the terms of Paragraph 9.4, there can be no legitimate expectation. But in any event, in my view the petitioner has failed to show that the concession gave rise to "a clear, unambiguous and unqualified representation": R v IRC ex part MFK Underwriting [1990] 1WLR 1545, 1570B per Bingham LJ. An applicant "may be entitled" to the benefit of the concession. That does not meet the requirements set by Bingham LJ.

[33] The petition also mentions that the petitioner had a legitimate expectation "based on their knowledge and experience of other developers." Given that it appears to have proceeded upon Mr Duncan's mistaken belief that a claim to recover three years' input tax in respect of services was allowable, that averment might be regarded as surprising. Senior counsel for the respondent informed the court that she had personally checked the position with the Policy Unit. It had confirmed to her that there was no such practice. However, I agree with her submission that the petitioner's averment falls to be dismissed as being wholly lacking in specification.

Conclusion

[34] For the reasons given above, I shall sustain the first, second and third pleas-in-law for the respondent and refuse the prayer of the petition.