[2012] UKFTT 380 (TC)
TC02064
Appeal number:
TC/2010/07314
VAT – EXEMPT SUPPLIES – property – TOGC – option to
tax – belated notification - whether appellant decided to opt to tax on or
before completion – held no – appeal dismissed
FIRST-TIER TRIBUNAL
TAX CHAMBER
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ATCHEM LIMITED
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Appellant
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- and -
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THE
COMMISSIONERS FOR HER MAJESTY’S
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Respondents
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REVENUE AND
CUSTOMS
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TRIBUNAL:
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JUDGE GREG SINFIELD
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DR CAROLINE SMALL
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Sitting in public at 45 Bedford Square, London on 28 May 2012
Mr Vijay Mehta, Director, for the
Appellant
Mr Leslie Bingham, of HM
Revenue and Customs, for the Respondents
© CROWN COPYRIGHT
2012
DECISION
Introduction
1.
This is an appeal by Atchem Limited (“Atchem”) against the decision of
the Respondents (“HMRC”) to refuse to accept a belated notification of an
option to tax a property under Schedule 10 to the VAT Act 1994 (“VATA”). It is
not possible to make an option to tax retrospectively but HMRC will normally
accept late notification of an option where the person can provide evidence
that the decision to opt was made at the relevant time. The sole issue in this
appeal is whether Atchem decided to opt to tax the property on or before
completion of its purchase of the property so as to enable the transaction to
be treated as a transfer of a business as a going concern (“TOGC”).
Legislation
2.
Article 5 of the VAT (Special Provisions) Order 1995 provides that a
TOGC is neither a supply of goods nor a supply of services and thus no VAT is
chargeable. TOGC treatment can apply to the sale or transfer of a fully or
partially tenanted property by a landlord to another person even where the
option to tax has been exercised by the seller provided certain conditions are
met. Where the seller has opted to tax the property, two conditions relevant
to this appeal are:
(1)
the buyer must opt to tax the property by no later than the date on
which the grant of the property would (apart from the TOGC rules) be treated as
made; and
(2)
the buyer must also give written notification of the option to HMRC by
the same date.
Evidence
3.
Save for the date of the option to tax, the relevant facts were not in
dispute. We were provided with a bundle of documents and both parties made
submissions on the facts based on the documents. On the basis of the documents
and the submissions of the parties, we find the facts to be as follows.
Facts
4.
Atchem is primarily a retail chemist and pharmacy business. The company
was registered for VAT with effect from 29 March 2004. In 2008, Atchem decided
to purchase a chemist’s shop at Units 2 and 3 Cors Y Gedol, High Street,
Barmouth, North Wales LL42 1DP (“the Property”) not to occupy it but as an
investment property. The Property had been advertised for sale at an auction
to be held on 17 April 2008. Three days before the auction, Mr Mehta, a
director of Atchem, made an offer to buy the Property for £300,000, excluding
VAT, which was accepted. On 16 April, the directors of Atchem held a
Board Meeting to confirm the purchase of the Property “at the cost of £300,000
plus VAT”. The minutes of the meeting record that:
“The board confirmed the
purchase of the property and confirmed that Mr Vijay Mehta should conclude the
transaction and do the necessary that may be required to acquire this property
under TOGC subject to advice from the solicitors [for Atchem].”
5.
The owner of the Property was Urbanbuild (Special Projects) Limited
(“the Seller”). The Property was let to a tenant, L Rowland & Co (Retail)
Limited. The auctioneer provided a sale contract. Clause 15 stated that the
purchase price was exclusive of VAT and that the parties would use all
reasonable endeavours to procure that the sale would be treated by HMRC as a
TOGC. The auctioneer’s Common Auction Conditions referred, at Condition 15, in
more detail to the obligations of the parties where they intend the sale to be
a TOGC. Condition 15.3 stated that the buyer confirms that, among other
things, it has made, or will make before completion, a VAT option. Condition
15.4 stated that the buyer is give the seller, as early as possible before
completion, evidence that it has made a VAT option and notified it in writing
to HMRC.
6.
On 2 May 2008, Atchem’s solicitors wrote to the Seller’s solicitors to
ask “what action your clients are taking to confirm that this is a sale of a
business as a going concern”. The Seller’s solicitors replied, in a letter
dated 6 May 2008, that “our clients will be making the appropriate returns” and
asking for a copy of Atchem’s VAT registration certificate. On the same day,
Atchem’s solicitors wrote to Atchem and stated:
“The contract does however
provide that both parties will try to make the transaction a transfer of a
business as a going concern which means that VAT will not be paid on the
price. I have supplied your VAT registration number as given to me by you to
the sellers and asked them what they are doing to ensure that the transaction
is indeed a TOGC so that no VAT will be payable.”
Mr Mehta said that he did not receive any other advice
from the solicitors about TOGC treatment.
7.
Completion of the sale of the Property took place on 16 May 2008. The
sale was treated as a TOGC and no VAT was charged. Atchem did not notify HMRC
in writing that it had opted to tax the Property on or before 16 May 2008. Following
completion, Atchem collected rent from the tenant but did not charge the tenant
any VAT or account to HMRC for VAT in relation to the property until February
2011.
8.
At a routine inspection of the Seller’s VAT records, HMRC asked to see
evidence that Atchem had opted to tax the Property in order to support the
treatment of the sale as a TOGC. We were told by Mr Mehta that the Seller’s
solicitors contacted Atchem and asked whether Atchem had opted to tax the Property.
On or shortly after 3 December 2010, Atchem submitted a Form VAT 1614A ‘Notification
of an option to tax land and/or buildings’ in relation to the Property to HMRC.
The form requested an effective date for the option to tax of 16 May 2008. HMRC
replied, by letter dated 31 January 2011, setting out what evidence was
required in order for HMRC to accept a belated notification of an option to tax
and asking Atchem to provide it. Atchem responded, by letter dated 9 February
2011, with a Form VAT 1614H ‘Opting to tax land and buildings application for
permission to opt’. As it clearly states, Form VAT 1614H must be used where a
person has made exempt supplies of the property in 10 years prior to the option
taking effect. On the form, Atchem asked for the option to take effect from 22
February 2011. After further exchanges of correspondence, HMRC in a letter
dated 3 May 2011, gave permission, subject to conditions, for Atchem to opt to
tax the Property with effect from 22 February 2011.
9.
Mr Mehta of Atchem wrote a letter dated 16 June 2011 to HMRC asking them
to make the option effective from 16 May 2008 so that the sale of the Property
could be treated as a TOGC. After further correspondence, HMRC confirmed, in
an undated letter sent on or about 18 August 2011, their decision refusing to
accept Atchem’s belated notification of an option to tax made in May 2008. Atchem
appeals against that decision.
Submissions by Atchem
10.
Mr Mehta on behalf of Atchem acknowledged that the company made two
mistakes in relation to VAT and the Property. First, it did not notify HMRC in
writing of its decision to opt to tax the Property within 30 days of the
decision and on or before 16 May 2008. The second mistake was that it did not
charge the tenant VAT on the rent for the Property between May 2008 and
February 2011.
11.
Mr Mehta said that Atchem did not know that it had to notify HMRC that
it had made the option to tax the Property. He acknowledged that he had seen
the auctioneers’ documents and that they referred to the buyer’s obligation to
notify the option but he frankly admitted that he had not read them carefully
enough. Mr Mehta said that Atchem was not properly advised by its solicitors.
They did not tell Atchem that it needed to notify HMRC of the option. Atchem
thought that the notification was dealt with by the Seller and this was what
its solicitors had meant when they said “our clients will be making the
appropriate returns”.
12.
Atchem accepted that because it had not notified HMRC before completion
that it had opted to tax the Property, the sale of the Property could not be
treated as a TOGC. Mr Mehta said that Atchem had already paid the Seller the
VAT. Nevertheless, the effective date of the option was important because of
the effect it had on Atchem’s ability to recover the VAT charged by the Seller
on the sale. If the option took effect on 16 May 2008 then Atchem could
recover all the VAT charged immediately. If, however, the option took effect on
22 February 2011 then Atchem would only be able to recover part of the VAT
charged through a series of adjustments under the Capital Goods Scheme.
13.
Mr Mehta submitted that Atchem had decided to opt to tax the Property
when it decided to buy the Property as a TOGC. Atchem relied on the minutes of
the Board meeting at which Atchem’s directors confirmed that the Property would
be acquired as a TOGC; the terms of the contract with the Seller; and the
written communications between the Seller’s solicitors and Atchem’s solicitors.
14.
Mr Mehta stated that the reason that Atchem did not charge the tenant
VAT on the rent was because Atchem believed that TOGC treatment, where no VAT
is charged on the sale of the property, also applied to the subsequent letting
of the property. Mr Mehta submitted that the tenant was fully taxable and
would have recovered any VAT charged on the rent so no VAT had been lost.
Submissions by HMRC
15.
Mr Bingham referred to HMRC’s policy in relation to the exercise of
their discretion to accept a belated notification of an option to tax. It is
set out in Business Brief 13/05 of 4 July 2005 and in paragraph 4.2.1 of Notice
742A ‘Opting to tax land and buildings’ (June 2010). In summary, HMRC will
normally accept a belated notification if the person seeking to
notify can provide evidence that the decision was made at the relevant time and
that is not contradicted by inconsistent treatment of supplies of the
property.
16.
HMRC accepted, as do we, that there was no suggestion that Atchem was
trying to avoid tax. HMRC’s position was that they could not accept Atchem’s
belated notification because the company had not produced any evidence that it
had decided to opt to tax the Property on or before 16 May 2008. HMRC’s view
remained that the minutes of the Board meeting on 16 April stopped short of
evidencing a decision to opt. Further, the fact that Atchem did not charge VAT
on the rents until February 2011 contradicted the assertion that the company
had opted to tax the Property before then.
Discussion
17.
An option to tax cannot be made retrospectively (see Fforestfach
Medical Centre v HM Customs and Excise (2000) VAT Tribunal Decision No
16587) but, in certain circumstances, HMRC will accept a belated notification
of the option. HMRC have said in Notice 742A that they will accept a belated
notification where the person provides evidence that the decision to opt was
made at the relevant time. The issue in this appeal is whether Atchem decided
to opt to tax the Property on or before 16 May 2008.
18.
There is no prescribed procedure for making an option to tax a property,
merely deciding to opt is sufficient, but if there is no express record of the
decision then it may be difficult or impossible for a person to demonstrate
that it has opted in relation to a property. That is the position of Atchem in
this appeal. As explained to Mr Mehta at the hearing, the burden of proof is
on Atchem to establish that it decided to opt to tax the Property on or before 16
May 2008. Atchem must establish that fact on the balance of probabilities ie
that it was more likely than not that it had decided to opt.
19.
Our conclusion is that Atchem has not satisfied us that it decided to
opt to tax the Property on or before 16 May 2008. We accept that Atchem had
decided to purchase the Property as a TOGC but we are not satisfied that Atchem
understood that that required a decision to opt to tax. Our view is that
Atchem only became aware that it had to opt to tax the Property and only
decided to do so when it was informed that HMRC were asking the Seller for
evidence of Atchem’s option. We take this view for the following reasons:
(1)
The minutes of the Board meeting on 16 April 2008 do not contain any
reference to an option to tax. They confirm that Atchem decided to buy the
Property at the cost of £300,000 “plus VAT” and as a TOGC. As VAT is not
chargeable on a TOGC, this suggests some confusion as to the VAT treatment of
the purchase of the Property. We do not consider that a decision to opt can be
inferred from the minutes.
(2)
Atchem used Form VAT 1614H in February 2011 after its initial attempt to
notify an option was rejected. As is clear from its face, Form VAT 1614H is
only appropriate where the person has previously made exempt supplies of a
property. The fact that Atchem used Form VAT 1614H is consistent with Atchem
not having opted to tax the Property previously.
(3)
Atchem did not charge VAT to the tenant until February 2011. The
failure to charge and account for tax is consistent with not having opted to
tax the Property. We do not accept that because VAT is not charged on a TOGC
(the key word is ‘transfer’), it was logical of Atchem to conclude that VAT
should not be charged on a letting of the Property.
Decision
20.
In view of our findings of fact, our decision is that the appeal must be
dismissed.
Rights of appeal
21.
This document contains full findings of fact and reasons for the
decision. Any party dissatisfied with the Tribunal’s decision has a right to
apply for permission to appeal against it pursuant to Rule 39 of the Tribunal
Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than
56 days after this decision is sent to that party. The parties are referred to
“Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)”
which accompanies and forms part of this Decision Notice.
Greg Sinfield
TRIBUNAL JUDGE
RELEASE DATE: 13
June 2012
