First-tier Tribunal (Tax)

[2010] UKFTT 5 (TC)

TC00324

Appeal number MAN/06/0869

VAT – assessment – sale of land – option effective? – automatic permission? – yes – output tax payable.

FIRST-TIER TRIBUNAL

TAX

                                         ULTRAPOLYMERS LTD                        Appellant

                                                                      - and -

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                                   REVENUE AND CUSTOMS               Respondents

                                                TRIBUNAL: JUDGE RICHARD BARLOW

Sitting in public in Manchester on 9 June 2009 and 3 November 2009.

Mr Nigel Gibbon of Northgate for the Appellant

Mr Stefan Brochwicz-Lewinski of counsel instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1.     The appellant appeals against an assessment for VAT being output tax in the sum of £297,872 in the prescribed accounting period of three months ending 31 October 2004.  The assessment relates to a single transaction in that period which consisted of the sale of a commercial property in Cheadle Hulme on 2 August 2004.  The property was sold for £2,000,000 and the respondents contend that the transaction was subject to VAT because the appellant had ‘opted to tax’ the property before the sale and should have accounted for output tax but did not do so.

2.     The parties have agreed some of the facts in this case including the facts that the business operated by Ultrapolymers Ltd had been a division of the BASF conglomerate until November 2002 when it was sold (along with other businesses) to a Belgian company called Ravago Holdings SA as a transfer of a going concern.  Thereafter Ultrapolymers continued to operate the business much as before.

3.     At or about the time of the transfer of the going concern, Ultrapolymers bought the premises called the Sovereign Buildings, which are the subject of this appeal, from BASF.  Those premises had been occupied by Ultrapolymers and another part of the BASF conglomerate called Cheadle Colour Chemicals Ltd (‘CCC’) before the transfer.  CCC later became BTC but I will refer to it as CCC throughout.  CCC was not sold to Ravago but both that company and the appellant continued to occupy the Sovereign Buildings and CCC became the appellant’s tenant under a lease dated 1 January 2003.

4.     Prior to the transfer, CCC had administered the financial transactions of Ultrapolymers and despite the transfer that continued to be the case, indeed to the extent that, after the transfer, Ultrapolymers did not have its own bank account for some time.  Mr Gibbon rightly described that as an odd sate of affairs and it seems that the reason for it was that the affairs of the two companies had been so intertwined that all concerned realised that it would take some time to untangle them.

5.     On 1 April 2003 Ms Caroline Medcalf ACCA, who gave evidence at the hearing, was appointed as the appellant’s financial controller.  She began the task of separating the accounting records of CCC and the appellant and set up a bank account for the appellant. 

6.     In July 2003 the appellant received a VAT visit and it was Ms Medcalf who dealt with the officers.  The appellant has alleged that the officers misdirected it at that visit and encouraged it to opt to tax Sovereign Buildings.  Mr Gibbon accepted that even if there had been a misdirection that would not afford the appellant a ground of appeal falling within the jurisdiction of the Tribunal and I will make no finding about it.  I am satisfied on the evidence of Ms Medcalf that at that meeting the question of the option to tax did arise.  Ms Medcalf, when being cross examined, stated that up until 1 October 2003, on which date a notification of an option to tax form was completed, Ultrapolymers had not shown any intention to charge CCC VAT on the rent it was paying for the property.  However she also said it had always been her intention that the appellant would claim input tax and that was why she opted to tax the property.  She said that she thought that by filling the form in the appellant would be able to carry on as before so far as the VAT return was concerned.  Those statements appear to be illogical and contradictory but Ms Medcalf claimed that she thought that was what the officers had said would be the case. 

7.     There are circumstances in which input tax incurred before the option is exercised can be claimed after the option is exercised for example because of the operation of the capital goods scheme (and see also Business Brief 17/96).  There is no reason to think Ms Medcalf knew about those rules but her evidence was that as a result of the discussion with the officer at the visit she formed the belief that some input tax would be claimable from before the exercise of the option and as a result of making it.  I accept that evidence was truthful and find as a fact that she did form that belief, though I am making no finding that the belief was justified by anything the officer said.  Why Ultrapolymers did not then account for output tax when the property was sold is unclear.   

8.     Having received the assessment for output tax the appellant now wishes to avoid having to pay the assessed sum by contending that there was no option to tax in place and so the sale was not a taxable supply and would be exempt.

9.     The appellant submitted an option to tax notification to the respondents on a form VAT 1614 dated 1 October 2003 and ticked the box to say it had made no exempt supplies of the land.  The form says “By this [ie making an exempt supply] we [ie HMRC] mean granting a lease, licence to occupy or a right over land.”

10.  The appellant had ticked the box saying that it met the conditions for automatic permission though in fact it appears it had made no adequate enquiries to see if that was in fact the case.

11.  If such exempt supplies have been made before the option then permission is required under paragraph 28(1) of Schedule 10 to the VAT Act 1994 from HMRC before the option can take effect unless the automatic conditions have been met.  If the two statements referred to above are true then the option will indeed have been granted automatically but the appellant now claims that it had made exempt supplies before the purported option and that it did not meet the conditions for automatic permission.  The terms on which the automatic permission is granted are set out in Public Notice 742A which has the force of law under paragraph 28(2) of Schedule 10 of the VAT Act 1994.  Only condition 2 is relevant in this case.  The relevant parts of Notice 742A are:

 “5.2 Automatic permission

Since 1 March 1995 you have not needed to obtain our written permission before you opt to tax provided you meet the conditions we have set out in a notice. The conditions have changed from time to time. If you meet any of the 4 conditions set out in Box D below you do not need written permission before you opt to tax:

Box D

2. You do not wish to recover any input tax in relation to the land or building incurred before your option to tax has effect; and

§        the consideration for your exempt supplies has, up to the date when your option to tax is to take effect, been solely by way of rents or service charges and excludes any premiums or payments in respect of occupation after the date on which the option takes effect. Regular rental and/or service charge payments can be ignored for the purposes of this condition. Payments are considered regular where the intervals between them are no more than a year and where each represents a commercial or genuine arms length value; and

§        the only input tax relating to the land or building that you expect to recover after the option to tax takes effect will be on overheads, such as regular rental payments, service charges, repairs and maintenance costs. If you expect to claim input tax in relation to refurbishment or redevelopment of the building you will not meet this condition.

Notes: When deciding whether you meet this condition you should disregard:

§        any input tax you can otherwise recover by virtue of the partial exemption de minimis rules (Regulation 106, VAT Regulations 1995); and

§        any input tax you are entitled to recover on general business overheads not specifically related to the land or building, such as audit fees.”

12.  The respondents contend that the appellant had not made any exempt supplies before the form was submitted because, although they had granted the lease, they had not collected any rents.  On that basis they argue that permission was not needed for the option in any event and that all that was required was its notification.  They also contend that such input tax as the appellant wished to recover that had been incurred before the option fell within the de minimis levels and so the automatic conditions were satisfied whether or not that input tax also fell within the two bullet points because it could be disregarded.

13.  The appellant contends that rent payable before the option was collected by being included in the reconciliation of the numerous sums payable between CCC and the appellant which led to an overall settlement between those two companies.  The appellant contends that it wished to recover input tax in relation to the land incurred before the option was to have effect and that that input tax exceeded the de minimis thresholds so that the automatic permission was not available to it.

14.  Despite the fact that this appeal was heard nearly three years after the assessment was raised the appellant was unable to produce very satisfactory evidence of the basic facts on which it relied so far as any claim for input tax was concerned.

15.  Mr Damian Walmsley, a partner in Moore and Smalley LLP chartered accountants, made a witness statement which was agreed by Mr Lewinski on behalf of the respondents so far as it related to statements of fact rather than opinion and so he was not called to give evidence.  His statement includes the following:

“I can say that I believe the payments in the [appellant’s] cash book would have included the rental income due from CCC/BTC to [the appellant], as both parties were aware of the lease being in existence and the amount of rental payments due under the lease and the due dates the payments were required to be made.  Certainly by the time the rent was invoiced, considerable sums of monies had been transferred to [the appellant] and the accounts were being balanced, this balancing exercise would have included rent due.”

16.  That statement falls short of stating as a fact that the cash book included the rental income but it establishes that both parties knew about the lease and the rent due and that there had been a transfer of money from CCC to Ultrapolymers which was at least intended to balance the books between the two companies.

17.  The cash book was referred to by Ms Medcalf in her evidence and she produced extracts from it which showed that CCC made large payments of round sums to Ultrapolymers before the date the VAT 1614 was submitted.  The amounts involved exceeded £3,000,000 largely because Ultrapolymer’s trading income was being paid into the CCC account.  I am satisfied by Ms Medcalf’s evidence that those payments included at least part payment of rent under the lease for periods before the option was notified.

18.  Ms Medcalf produced the lease between the appellant and CCC in respect of the building and schedule 4 of the lease shows how the costs of the upkeep of the building were agreed to be split between the two companies and it appears from those documents that the annual cost incurred by Ultrapolymers for its share of the shared expenses was £22,214.  Mr Gibbon argued that the total including CCC’s share should be taken as the relevant figure because that would be payable by Ultrapolymers in the first place and would be re-charged to CCC.  In that case the figure for the year would be £53,793. He also contended that that figure should be taken as VAT exclusive so that the input tax would be £9,413 or £784.48 per month which exceeds the de minimis figure which is £625 per month on average.  If the figure of £53,793 is tax inclusive the monthly input tax would be £667.

19.  However, the automatic permission is granted when the person opting to tax the property either does not wish to claim any input tax “in relation to the land or building” or when such as he does wish to claim is within the de minimis limits.  Quite a large proportion of the £53,793, whether VAT inclusive or exclusive, was in relation to items that did not relate to the land or building but rather to the operations being carried out there.  Approximately £25,000 relates to security patrols and CCTV cameras which were not in relation to the land or building but in relation to the operations being carried on there (the storage of valuable goods).    

20.   In addition Ms Medcalf produced a schedule of items which she claimed included input tax relating to the building and sprinkler system and invoices from suppliers relating to the schedule.  The total input tax on these invoices was claimed to be £4,079 but when Ms Medcalf was cross examined she was unable to state with any certainty in many cases why those invoices related to the building as opposed to operations conducted within it, casting further doubt on whether the input tax relating to the land or building exceeded the de minimis threshold.

21.   I hold that on the balance of probabilities the evidence shows that the input tax the appellant wished to recover in relation to the land or building which it wishes or wished to recover before the option to tax was below the de minimis limit was to be ignored for the purpose of the conditions applicable to automatic permission.  It follows that automatic permission was granted and the option was effective so that the appellant made a taxable sale when it sold the property and is liable to account for output tax as assessed in the sum of £297,872.

22.  The appeal is dismissed.        

       RICHARD BARLOW

TRIBUNAL JUDGE

RELEASE DATE: 4 January 2010