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Cite as: [2005] UKVAT V19326

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Marlow Gardener & Cooke Ltd Director Pension Scheme v Her Majesty's Revenue and Customs [2005] UKVAT V19326 (04 November 2005)

19326

ELECTION TO TAX – Belated notification – Evidence of election – Whether notification made after property has been sold can be effective – Yes – Whether fact that VAT was charged on rents was sufficient evidence of election – Yes – VATA Sch 10 pp 2 and 3(6)

LONDON TRIBUNAL CENTRE

MARLOW GARDNER & COOKE LTD Appellant

DIRECTORS PENSION SCHEME

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: STEPHEN OLIVER QC (Chairman)

TONY RING CTA

Sitting in public in London on 24 and 25 October 2005

Eamon McNicholas, counsel, for the Appellant

Robert Kellar, counsel, instructed by the acting solicitor and general counsel for HMRC, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

The Trustees of the Marlow Gardner and Cooke Ltd Directors' Pension Scheme ("the Trustees") appeal against a decision of the Customs dated 27 February 2004 to accept the belated notification by Net Support Ltd ("Net Support") of its election to waive exemption on Unit A Boon Court, Papyrus Road, Werrington, Peterborough ("the Property").

The special feature of the case is that, when Net Support notified the Customs of the election, it had ceased to own the Property. The Trustees' challenge is based on that and on their claim that, in any event, no election had been made in the first place.

General introduction

With certain exceptions that are not material here, (and subject to the exercise of the election to waive exemption, otherwise known as the "option to tax" or "election to waive exemption"), the grant of any interest in or right over land is an exempt transaction for VAT purposes: see VAT Act 1994 Schedule 9, Group 1.

Schedule 10 paragraph 2 provides (again subject to exceptions, such as grants for relevant residential purposes) that:

"… where an election under this paragraph has effect in relation to any land, if and to the extent that any grant made in relation to it at a time when the election has effect by the person who made the election, or where that body is a corporation by that person …, would (apart from this subparagraph) fall within Group 1 of Schedule 9, the grant shall not fall within that group."

Thus, an election under paragraph 2 by the person who makes what would otherwise be an exempt grant of a particular piece of land has the effect of turning the grant into a taxable supply. What amounts to an election? When does it have effect?

An election is the exercise of a right to choose. Schedule 10 paragraph 2 grants the option and the exercise brings the land and grants relating to it into the regime of taxable supplies. Unless exercised the "owner" may not charge VAT on rents or other consideration received in return for such grants; nor may the owner recover input tax for supplies used in making the grant. The exercise of the election is a unilateral act by the person in question and may be made by any method, formal or informal. How the option is to be exercised will depend on the terms of the instrument or contract that grants it. Because a person's exercise of the election to tax affects his rights against third parties, e.g lessees and purchasers, and his rights against the Customs, e.g. to recover input tax, the VAT regime lays down statutory rules governing its recognition as effective; they do not, however, prescribe how the actual exercise of the option is to be made. The rule relevant to the present appeal is Schedule 10 paragraph 3(6). It was introduced by the VAT (Buildings and Land) Order SI 1995/279 with effect from 1 March 1995. It provides that an election made on or after 1 March 1995 will be effective only if:

(i) written notification of the election is given to the Commissioners not later than the end of the period of 30 days beginning with the date on which the election is made, or not later than the end of such longer period beginning with that day as the Commissioners may in any particular case allow, together with such information as the Commissioners may require."

Two points stand out. First, the election must be made by the person who makes the grant of the land to which it relates. Second, for the election to be effective, i.e. binding on the grantee and on the Customs, notification of it must be given to the Customs in the manner prescribed in paragraph 3(6). The consequences are that the election cannot be retrospective; it has effect from the day on which it is made so long as it is duly notified in the manner prescribed. The notification may be made late and, if the Customs so decide, accepted; that makes it a belated notification, but not a retrospective election.

As already noted, two issues arise in the present appeal. The first is whether the seller, Net Support, ever made an election to tax the Property which, in the events, was sold to the Trustees on 21 January 2004. The second is whether, assuming there had been an election to tax the Property, the notification made on 20 February 2004 by Net Support was effective. Tax was charged by Net Support on the sale. The contract provided that it should be and Net Support issued a VAT invoice. We start with the second issue.

Can an election be effective when the person who made the election while owning the land notifies it when no longer the owner?

There is nothing in the UK law that prevents this. There is nothing surprising about this. Take the case of a person who is about to sell land and elects to tax it (with the full connivance of the purchaser) three days before the actual sale. His notification within the next 30 days is required to make the election effective. He accounts for VAT on the sale proceeds and the purchaser is entitled to claim credit for that VAT as input tax. It is said for the Trustees, however, that, to the extent that paragraph 3(6) allows this, it is "ultra vires" the authority given to the UK by Article 13C of the EC Sixth Council Directive. Thus, it is said, the Customs cannot rely on paragraph 3(6) as enabling them to accept Net Support's notification which was made some 30 days after the date of sale; consequently Net Support's election was ineffective and VAT was not properly charged on the sale.

The applicable parts of Article 13 of the Sixth Directive are, so far as is relevant, as follows:

"B. Other Exemptions

(g) The supply of buildings … and of the land on which they stand …

C. Options

Member States may allow taxpayers a right of option for taxation in cases of:

(a) …

(b) the transactions covered in B … (g) …

Member States may restrict the scope of this right of option and shall fix the details of its use."

The Trustees say that, by the time notification was made, Net Support was no longer the taxable person in relation to the Property. The election cannot therefore be effective. In terms of Article 13C, they say, Net Support was not the taxable person at the time when it purported to exercise its "right of option to tax". The United Kingdom had no right to enact a provision that produced a contrary result.

There was considerable debate as to whether Article 13C has direct effect. We are prepared to assume without deciding the point that it does. But that does not help the Trustees. Article 13C, properly construed, does not have the meaning the Trustees seek to place on it. What Article 13C is saying is that the right to elect to tax may be allowed to the taxable person in relation to a supply of land; the scope of the right and the conditions on which it is recognized as effective may be the subject of special rules made by the Member State. Thus, a person will have a right to elect when he is or becomes the "owner" of the land which is the subject-matter of the supply. The domestic rule of the Member State covering the scope of the right to elect and fixing the details of its use may, as paragraph 6(3) does, require subsequent notification of the exercise of that right in order to make it effective for all the VAT purposes.

Here the assumption is that Net Support duly exercised its right to elect on or by 31 October 1998. That is enough to satisfy the words of the first part of Article 13C (i.e. down to the end of paragraph (b)). The subsequent and very belated notification of Net Support's election makes it effective as a matter of UK law; this is because the UK provisions (paragraph 3(6)) are within the scope of the second part of Article 13C. Those provisions properly "restrict the scope of the right" by making the effectiveness of the election dependent upon notification and "fix the details of its use" by, again, prescribing the rules as to notification.

The Trustees' interpretation of Article 13C is, we think, wrong in saying that Net Support was not the taxable person when it purported to exercise its "right of option to tax". Net Support exercised that right in 1998 when it owned the land. The subsequent notification is required by the UK rules which are themselves authorized by Article 13C. We therefore decide the issue against the Trustees.

On the facts, did Net Support elect to tax the Property in or by 31 October 1998?

On 31 October 1998 the company now known as Net Support was called Productive Computer Insight Ltd. Its registration number was 238 6638. The name change to Net Support was certificated on 27 March 2003.

The notification of the "option to tax" was dated 20 February 2004. It was signed by the finance director of Net Support and it relates to the Property. An accompanying letter of 20 February from the accountants to Net Support states:

"… We enclose the Notification in the form of a Form 1614 with an effective date of 31 October 1998, the date when the first rental invoice was issued."

The letter records "the facts" which we now summarize:

(i) The Property had been purchased by the company for £195,000 plus VAT on 6 September 1998. The company makes standard rated supplies and recovered the input VAT in full.

(ii) On 31 October 1998 the company let part of the building (less than 10%) to an associated company. A decision was made by the company to charge VAT on the rent of the premises from the outset.

(iii) VAT had been accounted for on the rent on quarterly VAT returns.

(iv) In the year ended 31 March 2000 an extension had been built and the input VAT on the cost had been recovered in full.

(v) The Property had been sold in January 2004 and a sales invoice with VAT charged at the standard rate had been raised for the sale.

The letter goes on as follows:

"The purchaser disputes whether VAT is in fact validly chargeable on the grounds that no election to opt to tax has been notified to Customs and Excise. Our concern was that an election to opt to tax could have been deemed to have been made when the decision to charge VAT on the rent was made and VAT could be chargeable on the sale proceeds, notwithstanding a failure to notify Customs and Excise of that election to date".

The Customs, on 27 February 2004, accepted the belated notification. That decision was reviewed by the Customs in September 2004. On 14 September the Customs wrote to Net Support asking for copies of invoices issued in relation to the rental of the Property, copies of any advice from professional advisers regarding the exercise of the option to tax, copies of any minutes or agreements showing when the decision had been taken and extracts from Net Support's VAT accounts showing the output tax on rental income from the Property being accounted for during the period when it was owned by Net Support.

Net Support responded on 1 October 2004 enclosing "tax invoices" issued in relation to the Property from 31 October 1998 until 21 January 2004. (These described the issuer as Net Support throughout and appeared to be new printouts; they certainly could not have been either copies or facsimiles of the originals, at least until the name change.) The letter of 1 October explains that no professional advice had been taken, that there were no minutes or agreements showing when the decision to charge VAT had taken place and that the decision to charge VAT had been taken by the finance director of Net Support. Included in the letter were extracts from Net Support's VAT account showing output tax on the rental income from the Property during the period of Net Support's ownership.

The review officer confirmed the decision that a notification of the election had been effective.

The Trustees challenged the decision. They say that no election to tax the Property was made by Net Support. In support of this they rely on circumstances and explanations that arose during the lead up to the sale on 21 January 2004. In particular they rely on the understandings of the VAT position as expressed by the solicitors acting for Net Support on the conveyance. The Trustees called Mr P L Tate, solicitor and partner in the firm of Hunt & Coombs, to give evidence. His firm had acted for the Trustees on the conveyance from July 2003 onwards and he was personally involved during the last month leading up to exchange and completion on 21 January 2004.

The Heads of Terms for the sale of the Property were drawn up by Net Support's surveyors. The purchase price is specified as £420,000 plus VAT. The Land Registry entry has "the Proprietor" entered as Productive Computer Insight Ltd. (It was not in dispute that this was the same company as Net Support.)

Presented by Hunt and Coombs with the Commercial Property Standard Enquiries (i.e. the general pre-contract enquiries for all commercial property transactions) the solicitor for Net Support responded on 13 September 2003 and answered "Standard Rated" to question 22 which asks – "Will the transaction be standard rated/exempt/zero-rated/outside the scope?" In answer to question 23.1 ("Why do you think the Transaction is standard-rated?") the solicitor answered "Commercial Property". Question 23 asks – "Has an election to waive the exemption for VAT been made in respect of … the Property by you …?" The answer given was "N/A".

On 22 September the solicitor for Net Support wrote saying:

"VAT will be charged on the purchase price – we have not kept a copy unfortunately of your preliminary enquiries (only of our replies!) refer you to 22. From memory the writer believes that 23 onwards related to the transfer of a business as a going concern which is not applicable here."

Hunt and Coombs wrote back on 29 September as follows:

"… there are one or two points we need to take up with you which are as follows –

VAT is to be charged on the sale price. You state in Replies that, in relation to the query regarding VAT election, this is not applicable. Would you clarify this please."

This was followed by a chasing letter and on 9 October the solicitor for Net Support e-mailed the following message:

"My clients paid VAT on the purchase price when they bought the Property so there has been no need for them to make an election."

Over the next few weeks Hunt and Coombs' attention turned to funding matters; because the clients were pension fund trustees the mortgage arrangements required special arrangements. Pressure to exchange built up in the meantime and Hunt and Coombs were instructed to proceed with exchange and completion in any event.

By January 2004 the parties were ready to proceed. A Hunt and Coombs file entry of 9 January notes that Net Support's solicitors are to send "replies to requisitions and VAT election". On 16 January Hunt and Coombs and Net Support's solicitors communicated by e-mail. Hunt and Coombs asked about "the election" and the response was:

"My clients paid VAT on it when they bought the Property – they have made no separate election."

Hunt and Coombs' return message was:

"As your client has not made a VAT election then we should not pay VAT. Please check the facts and urge your client not to make a VAT election until we have considered the situation together."

Later that day the solicitors to Net Support wrote:

"OK – agreed – I am double checking that no election has in fact been made since my initial instructions were to charge VAT but in replies to enquiries I see they said they had not elected."

On 19 January Hunt and Coombs wrote a letter observing that, absent of an election, Net Support might suffer a claw-back of the input VAT that they had recovered on the original purchase. The solicitor for Net Support wrote back the next day:

"Further to our various telephone conversations regarding the question of VAT on this transaction, it transpires that our client has let a part of this building to another company for five out of the six years of their ownership and has charged and accounted for VAT on the rent. This would appear, in our view and that of our client's accountant, to result in a deemed election, authority for which is attached.

In light of this, our client insists that the VAT is paid on completion and this is not negotiable. If your clients do not wish to proceed on this basis then please let us know."

("The authority" was an extract from Tolley's VAT Cases 2002 regarding the Tribunal decision in Fencing Supplies Ltd [1993] VATTR 302, VAT Dec 10451.)

Hunt and Coombs wrote back the same day questioning the position taken by Net Support's solicitors. But their instructions were to proceed in any event. Contracts were exchanged showing the price as £420,000 plus VAT. On 21 January 2004 Net Support issued a VAT invoice for £420,000 plus £73,500 of VAT.

The accountants to Net Support telephoned the "Option to Tax Unit" of the Customs and the next day wrote the letter of 20 February 2004.

The Trustees do not challenge the correctness of the five facts put forward in the Accountants' letter of 20 February. Otherwise, they say that that letter is self-serving and is not to be relied upon. The better evidence, the Trustees say, is to be found in the answers given by the solicitors to Net Support in the course of the pre-contract "correspondence". Those, properly understood, show that no election had been made in relation to the Property. What is more, the Trustees contended, no relevance should be placed on the invoice of 21 January that charged VAT; the fact that an invoice is issued is not enough to establish a liability to VAT on a particular transaction (see the decision of the European Court of Justice in Genius Holdings [1991] STC 239).

We noted earlier that no formality is required for the making of an election under paragraph 2 of Schedule 10. In the absence of, for example, a minute of the Board resolution or some specific documentary evidence of the actual decision to opt to tax the particular property the Customs and the taxpayer and the third parties potentially affected by the decision have to proceed on inferences to be drawn from other relevant primary facts. In Fencing Supplies (referred to above), for example, the Tribunal accepted as evidence of the election the fact that tax had been charged on rents. In Resource Maintenance Ltd (1993) VAT Dec 13204 the Tribunal accepted as evidence of the election the fact that tax had been claimed on work carried out on the property concerned. In most cases the election will, by the time the issue arises, have been notified and the Customs acceptance of that will have made it effective.

Here a notification of the purported election was made on 20 February 2004 and it was accepted by the Option to Tax Unit of the Customs initially and re-stated following the review. Mr McNicholas for the Trustees emphasized on many occasions that he had no criticism of the actions of the Option to Tax Unit. But the Option to Tax Unit had not had, for example, the pre-contract correspondence which, had it been read, should have displaced any possible inference that an election had been made by 31 October 1998 when part of the Property was let.

Our impression of the pre-contract correspondence is that the solicitors to Net Support were sure throughout that VAT was chargeable but were confused as to the reasons. The Heads of Terms said so unequivocally and the solicitors to Net Support said so unequivocally in their letter of 22 September 2003 though the writer's explanation, i.e. that VAT had been charged on the purchase price when the Property had been bought, was inadequate. On 16 January 2004 Net Support's solicitors return to the reason that VAT had been paid when the Property had been purchased. However their final position and that of Net Support's accountants was that there had been "a deemed election", on the strength of the Fencing Supplies decision, because Net Support had charged and accounted for VAT on the rent.

We are satisfied that Net Support had charged VAT on the rent since 31 October 1998 and had accounted for it. The VAT accounts provided by Net Support on 1 October 2004 for the purpose of the review were not challenged by the Trustees and they show that VAT was duly accounted for. And although the invoices supplied by Net Support to the Customs were in the wrong names (at least until the name change in March 2003), the fact that invoices had been issued to the tenant had not been challenged by the Trustees. VAT on the rent can only have been lawfully charged if a decision had been taken that the grant of the tenancy by "Net Support" to their tenant, an associated company, should be taxed; the presumption must be that Net Support acted lawfully and elected to tax the Property though failed to take the separate step of notifying the election to the Customs within the 30 days prescribed by paragraph 3(6) of Schedule 10.

In conclusion therefore we are satisfied from the evidence that on or by 31 October 1998 Net Support made the necessary election in relation to the Property to take effect from that date. The subsequent notification by letter of 20 February 2004 was nearly six years late. There has been no challenge to the Customs' discretion to accept it as a belated notification. The election was therefore effective for VAT purposes. VAT was properly charged and accounted for on the sale by Net Support to the Trustees.

For those reasons we dismiss the appeal.

STEPHEN OLIVER QC

CHAIRMAN

RELEASED: 4 NOVEMBER 2005

LON/04/1147