APPEALS BY DAVID MOULSDALE, trading as MOULSDALE PROPERTIES AGAINST THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS [2021] ScotCS CSIH

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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> APPEALS BY DAVID MOULSDALE, trading as MOULSDALE PROPERTIES AGAINST THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS [2021] ScotCS CSIH_29 (20 May 2021) URL: http://www.bailii.org/scot/cases/ScotCS/2021/2021_CSIH_29.html Cite as: [2021] ScotCS CSIH_29, 2021 SLT 996, 2021 GWD 17-253, [2021] CSIH 29, 2022 SC 167, [2021] STC 1077, [2021] BVC 10

FIRST DIVISION, INNER HOUSE, COURT OF SESSION

[2021] CSIH 29

XA39/20

XA94/20

Lord President

Lord Menzies

Lord Doherty

OPINION OF LORD CARLOWAY,

the LORD PRESIDENT

in the Appeals under section 13 of the Tribunals, Courts and Enforcement Act 2007

DAVID MOULSDALE, trading as MOULSDALE PROPERTIES

Appellant

against

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS

Respondents

_______________

Appellant: Simpson QC; Harper Macleod LLP

Respondents: DM Thomson QC, RG Anderson; Office of the Advocate Ge neral

20 May 2021

[1]

I am grateful to Lord Doherty for setting out the facts, issues and submissions in this

appeal. Ultimately, I consider that the Upper Tribunal correctly refused the appeal from the

First-tier Tribunal and that therefore these appeals ought also to be refused.

[2]

A central principle of Value Added Tax is that the incidence of tax should rest

primarily with the final consumer in the supply chain. In May 2001 the appellant bought

land, on which a block of offices had been built, from a developer. The land was in

Cumbernauld and the price was £1,140,000 plus VAT of £199,500. In September 2001, the

appellant leased the offices to Optical Express; a company with which he was connected. He

opted to tax the land (Value Added Tax Act 1994 Sch 10 part I). It is a reasonable

assumption that he did so with the intention of setting off the output tax, which he had paid

to the developer, against the input tax, which he would receive on any rent and which, but

for the offsetting, he would have to pay to the respondents.

[3]

The effect of opting to tax would normally be that any grant of an interest in the

land, such as the sale of the offices, would be liable to VAT (ie what would otherwise be an

exempt supply would become taxable). However, in certain circumstances, the statutory

provisions reverse that position by deeming the supply to be, once again, exempt.

[4]

The services supplied by Optical Express are exempt from VAT. Optical Express

would not be able to pass on any VAT which was charged on the rent to the consumers of

optical services. This, in turn, would mean, in effect, that the VAT paid by the appellant at

the start of the chain would not be passed on to the consumers either. In 2007, the

respondents advised the appellant that he ought not to have been charging VAT to Optical

Express since the rent was exempt. Although the appellant would thus be able to reclaim

the VAT on the rent, which had been paid by Optical Express and for which he had

accounted to the respondents, the practical effect was that he could not offset these

payments against the VAT which he had paid on the purchase of the offices in the first place.

[5]

In September 2014, the appellant sold the offices in an arm's length transaction to a

third party company, subject to the continuing occupation of Optical Express under the

lease. The third party was not VAT registered. The appellant did not charge VAT on the

sale. The question is whether he was correct not to do so.

[6]

Since the default position is that the sale of land, on which an option to tax has been

made, is subject to VAT, avoiding payment of that VAT can only be achieved if the appellant

were able to bring himself within a statutory exception. He attempts to do so by relying on

the provisions in Schedule 10 to the 1994 Act. These are described, in a general heading to

paragraphs 12 to 17, as "Anti-avoidance" measures. The use of anti-avoidance measures to

avoid accounting for tax is a curious, if not anomalous, situation indeed. It is one which, for

the following reasons, is not a sound one.

[7]

The anti-avoidance provisions are intended "to prevent an option to tax rendering

supplies taxable where certain conditions are met" (PGPH v Revenue and Customs

Commissioners [2017] UKFTT 782 (TC), Judge Falk at para 6). In the case of land, this is to

prevent, for example, the opportunity to deduct input tax when a further supply of the land

is made, but the supplier continues to occupy the land for exempt purposes. Thus, the price

and rent in a sale/lease and leaseback arrangement involving a connected tenant

(Corporation Tax Act 2010, s 1122), whose supplies were exempt, would not be taxable. This

maintains the principle of VAT being levied on the final consumer.

[8]

Against the background of the Capital Goods Scheme (VAT Regulations 1995

Part XV), which normally enables the VAT-bearing purchaser of land to offset the VAT on

the price against that on the incoming rent over a specified period of years (reg 114), the

anti-avoidance provisions cease to have a purpose once that period expires. The option to

tax would then continue to operate.

[9]

So far as relevant to the facts, paragraph 12 (which is headed "Developers of exempt

land") of Schedule 10 provides that a supply is not taxable, as a result of an option to tax, if

two conditions are met. The first is that the grant giving rise to the supply is made by a

developer. The second is that the "exempt land test" is fulfilled. In relation to the first,

"developer" does not have an ordinary meaning. In terms of paragraph 13, a grant is made

by a developer if, again, two conditions are met. The first is that the land is, or was intended

or expected to be, a "relevant capital item". The second is that the grant is made at an

eligible time in relation to that capital item. The question of time will be considered in due

course, although it was not a matter of significance in the arguments presented to the FtT or

the UT, nor did it feature in their decisions or in the submissions to this court.

[10]

The exempt land test is met if the seller of the land "intended or expected" that it

would become exempt land (para 12(2)(a)). In terms of paragraph 13 ("Meaning of grants

made by a developer"), a supply is made by a developer (para 13 (2)(a)) "if the land is, or

was intended or expected to be, a relevant capital item". Land is intended or expected to be

a relevant capital item if the grantor "intended or expected" inter alia that it "would become

a capital item in relation to the grantor or any ... transferee" (para 13(4)). It was accepted

before the FtT and the UT that, because the adjustment period in the Capital Goods Scheme

had expired, the land was not a capital item in relation to the appellant. The question before

the FtT and the UT was whether the appellant intended or expected that it would become a

capital item in relation to the purchaser (the transferee).

[11]

Before the FtT and the UT it was accepted that there was an inherent circularity in

the application of the provisions. If the tax opted land was no longer in the Capital Goods

Scheme, it would not be a capital item for the appellant. It would be such an item in the

hands of the purchaser if the statutory conditions were met and the land reverted to being

exempt. In that event, the supply would return to being taxable as the exemption would

have been disapplied.

[12]

All of this boiled down, before the FtT (para 31), to a fundamental question of

whether the appellant intended or expected (th at matter being subjective) the land to

become a capital item in the hands of the purchaser at the time of the grant. The FtT

considered that "capital item" was defined in Regulation 113 as an item on which the owner

incurred VAT bearing capital expenditure. The prudent taxpayer who had opted to tax

would first assume that tax would be due on the sale but would then check to see if it fell

into one of the exemptions. The FtT considered that the appellant had carried out this

exercise and had realised that Optical Express' occupation meant that the land was exempt.

The purchasers would only incur VAT if they were charged VAT, which they had not been.

[13]

The FtT held that:

"43.

As a matter of fact... at the date of the grant the appellant knew that the

supply would not be, and could not be, taxable. ... [G]iven the terms of Regulation

113(1)..., and knowing that no other relevant expenditure was likely, the appellant

could not have intended or expected that the property would become a capital item

in the hands of the purchaser".

The option to tax was therefore not dis-applied as the appellant could not have intended the

property to become a capital item in the hands of the purchaser. Put another way, if the

appellant had intended that the item would become a capital item, it would be exempt.

[14]

The UT considered that the FtT had correctly identified the question as being

whether the land was intended or expected to be a relevan t capital item in terms of

paragraph 13(2). The UT's function was to deal with issues of law. The UT held that the

FtT's findings were supported by the agreed facts and their conclusion was one which they

had been entitled to reach. Their decision was therefore not wrong in law. As the appellant

had opted to tax the property, any grant of that property would be taxable, unless it fell

within an exception (ie the taxable option became dis-applied). As the property was no

longer a capital item for the appellant, it could only fall within an exception if it were to be a

capital item in the hands of the purchasers.

[15]

The appellant had led no evidence on the central issue. Given that the buyers were

not VAT registered and the appellant knew that the supply would not be taxable, as he did

not charge any VAT, he could not have intended or expected that the property would

become a capital item in the hands of the purchaser. The UT determined that, on these facts,

the only expenditure which could make the property a capital item was when it was bought.

The UT observed that there was no evidence that the appellant had any intention or

expectation that the property would become a capital item in the hands of the purchaser.

The requirements for an exception could not be met where the appellant knew that the

invoice which was to be issued would treat the sale as exempt. In reaching that view, they

rejected a submission that the FtT ought to have taken into account the contents of a letter

from the Optical Express Group's secretary, namely Graeme Murdoch, which said that the

land was expected to be a Capital Goods Scheme item in the hands of the purchaser. The

letter had not been founded upon as evidence before the FtT and, in any event, little weight

could be attached to it.

[16]

For the anti-avoidance provisions to apply, the appellant required to demonstrate

that the option to tax had been dis-applied because, as a matter of fact, he intended or

expected the land to be a capital item in the hands of the purchaser. The problem for the

appellant is that he did not lead any evidence of his subjective expectation or intention in

relation to the status of the land as a capital item in the hands of the purchasers. Although

Mr Murdoch's affidavit made a passing reference to his letter of 22 December 2016, this

letter was a request for a review of the respondents' decision. It sets out Mr Murdoch's

understanding of the position and included a short sentence: "The property was expected to

be a Capital Goods Scheme item for the purchaser" together with a later explanation as to

why, as a matter of law, that might be so. No adequate basis for this assertion, in the context

of a non-VAT registered purchaser, was set out in the letter or in the form of any other

information before the FtT. Even if the FtT could be legitimately criticised for assuming that

the appellant's expectation or intention involved a consideration by him of the legislative

provisions, the absence of any form of evidence on the critical point remains. This is what

the UT identified and why the appeal was refused as not raising a point of law. There is no

ground upon which this court would be justified in reversing the decisions of the two

specialist tribunals on what was ultimately a matter of fact. On this basis, the appeals must

be refused.

[17]

It is worth observing, although the matter was not argued, that the alleged circularity

may be avoided and the same result reached if regard was had, when determining whether

the grant was made by a developer, to the provisions in relation to time. The second

condition for determining this is that the grant must be made at an eligible time in relation

to the capital item (para 13(2)(b)). The time limit is the end of the period "provided in the

relevant regulations for the making of adjustments relating to the deduction of input tax as

respects the capital item" (para 13(6)). For the purposes of paragraph 13, a "capital item" is

"an asset falling ... to be treated as a capital item for the purposes of the relevant

regulations" (para 13(8)); being the regulations for "adjustments relating to the deduction of

input tax to be made as respects that item" (para 13(9)).

[18]

Put shortly, the anti-avoidance provisions apply to capital items during an intended,

expected or actual adjustment period. Although regulation 112(2) of the Value Added Tax

Regulations 1995 may assist in defining a capital item generally, regulation 113 does not. It

is merely describing the types of item which will be considered to be part of the Capital

FIRST DIVISION, INNER HOUSE, COURT OF SESSION

[2021] CSIH 29

XA39/20

XA94/20

Lord President

Lord Menzies

Lord Doherty

OPINION OF LORD MENZIES

in the Appeals under section 13 of the Tribunals, Courts and Enforcement Act 2007

DAVID MOULSDALE, trading as MOULSDALE PROPERTIES

Appellant

against

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS

Respondents

_______________

Appellant: Simpson QC; Harper Macleod LLP

Respondents: DM Thomson QC, RG Anderson; Office of the Advocate General

20 May 2021

[19]

I too am grateful to Lord Doherty for his helpful summary of the facts and

submissions in this appeal. I agree with your Lordship in the chair that the appeal should be

refused.

[20]

Senior Counsel for the respondents submitted to this court that there was a short

answer and a longer answer to the question of how this appeal should be disposed of. The

short answer, he submitted, was that the appeal should be refused on the basis of the

findings in fact of the FtT. The appellant had simply failed to prove that at the time of the

grant he intended or expected that the property would become a capital item in relation to

the transferee. The longer answer was that, on a proper construction of the anti-avoidance

provisions in Schedule 10 to the Value Added Tax Act 1994, this transaction was not caught

because the price paid by the purchaser was not a relevant capital item, and VAT was

accordingly due by the appellant on the purchase price.

[21]

I am persuaded that the short answer is correct. I agree with paragraph 16 of your

Lordship in the chair's opinion. In order to succeed, the appellant had to satisfy the FtT in

terms of Schedule 10 paragraph 13(4) that he intended or expected that the land would

become a capital item in the hands of the purchaser. This involved a subjective test (see

Judge Falk's remarks in PGPH Ltd v Revenue and Customs Commissioners [2017] UKFIT 782

(TC), referred to by the FtT), and the onus of establishing it rested with the appellant. The

appellant had to show that he had an intention or expectation at the date of the grant. This

was a matter of fact. He did not lead any evidence about it. The FtT is a specialist tribunal.

In the absence of any evidence from the appellant on this critical issue, I consider t hat the

FtT was entitled to make the finding in fact which it did at paragraph 43 of its decision. I

also consider that the observations of the UT at paragraph 26 of its decision are correct the

function of the UT (and indeed of this court) is to deal with issues of law, and generally not

to revisit findings in fact. On the basis of the evidence before it, the FtT was entitled to make

the finding in fact which it made at paragraph 43 of its decision. The absence of any

evidence on behalf of the appellant on this critical point is central to the issue, and standing

this absence I do not consider that either the FtT or the UT can be criticised for refusing the

appeal.

FIRST DIVISION, INNER HOUSE, COURT OF SESSION

[2021] CSIH 29

XA39/20

XA94/20

Lord President

Lord Menzies

Lord Doherty

OPINION OF LORD DOHERTY

in the Appeals under section 13 of the Tribunals, Courts and Enforcement Act 2007

DAVID MOULSDALE, trading as MOULSDALE PROPERTIES

Appellant

against

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS

Respondents

_______________

Appellant: Simpson QC; Harper Macleod LLP

Respondents: DM Thomson QC, RG Anderson; Office of the Advocate General

20 May 2021

Introduction

[23]

On about 3 May 2001 the appellant purchased commercial office premises at

5 Deerdykes Road, Westfield, Cumbernauld. In September 2001 he let the property to a

company with which he was connected, Optical Express (Westfield) Limited ("Optical

Express"). On 9 May 2001 he exercised an option to tax in respect of the property in terms of

the Value Added Tax Act 1994 ("VATA"), Schedule 10, paragraph 2. On or around

2 September 2014 he sold the property to Cumbernauld SPV Limited ("Cumbernauld"). The

property remained subject to the lease to Optical Express. The sale was an arm's length one

- neither the appellant nor Optical Express were connected to Cumbernauld. The purchase

price was £1,149,374.35. In the documentation relating to the sale no part of that price was

attributed to VAT. The property became part of Cumbernauld's property leasing business.

[24]

In terms of VATA, Schedule 9, Group 1, item 1, supplies of land and buildings are

exempt supplies. However, the owner of land or buildings can opt to VAT in respect of a

particular property (VATA, Schedule 10, Part 1). Where the owner has opted to VAT,

generally a supply by him of the relevant property is not an exempt supply (VATA,

Schedule 10, paragraph 2(1) and (2)). Schedule 10, paragraph 12(1) provides that a supply is

not, as a result of an option to tax, a taxable supply, if (a) the grant giving rise to the supply

was made by a person ("the grantor") who was a developer of the land (the "grant by a

developer condition") and (b) the exempt land test is met. Schedule 10, paragraph 13

provides:

"....

(2)

A grant made by any person ("the grantor") in relation to any land is made

by a developer of the land if

(a)

the land is, or was intended or expected to be, a relevant capital item

(see sub-paragraphs (3) to (5)), and

(b)

the grant is made at an eligible time as respects that capital item (see

sub-paragraph (6)).

(3)

The land is a relevant capital item if--

(a)

the land, or

(b)

the building or part of a building on the land,

is a capital item in relation to the grantor.

(4)

The land was intended or expected to be a relevant capital item if the grantor,

or a development financier, intended or expected that--

(a)

the land, or

(b)

a building or part of a building on, or to be constructed on, the land,

would become a capital item in relation to the grantor or any relevant transferee.

(5)

A person is a relevant transferee if the person is someone to whom the land,

building or part of a building was to be transferred--

(a)

in the course of a supply, or

(b)

in the course of a transfer of a business or part of a business as a going

concern.

(6)

A grant is made at an eligible time as respects a capital item if it is made

before the end of the period provided in the relevant regulations for the making of

adjustments relating to the deduction of input tax as respects the capital item.

...

(8)

In this paragraph a "capital item", in relation to any person, means an asset

falling, in relation to the person, to be treated as a capital item for the purposes of the

relevant regulations.

(9)

In this paragraph "the relevant regulations", as respects any item, means

regulations under section 26(3) and (4) providing for adjustments relating to the

deduction of input tax to be made as respects that item."

The "relevant regulations" are the Value Added Tax Regulations 1995 (SI 1995 No. 2518)

("VATR"). Regulations 112 and 113 provide:

"Interpretation of Part XV

112.

...

(2)

Any reference in this Part to a capital item shall be construed as a referen ce to

a capital item to which this Part applies by virtue of regulation 113, being an item

which a person who has or acquires an interest in the item in question (hereinafter

referred to as "the owner") uses in the course or furtherance of a business carried on

by him, and for the purposes of that business, otherwise than solely for the purpose

of selling the item.

...

Capital items to which this Part applies

113.

(1)

The capital items to which this Part applies are any of the items specified in

paragraph (2) on or in relation to which the owner incurs VAT bearing capital

expenditure of a type specified in paragraph (3), the value of which is not less than

that specified in paragraph (4).

(2)

The items are--

(a)

land;

(b)

a building or part of a building;

(c)

a civil engineering work or part of a civil engineering work;

(d)

a computer or an item of computer equipment

(e)

an aircraft;

(f)

a ship, boat or other vessel.

(3)

The expenditure--

(a)

in the case of an item falling within paragraph (2)(a) or (d), is the

expenditure relating to its acquisition;

(b)

in the case of an item falling within paragraph (2)(b), (c), (e) or (f), is

the expenditure relating to its--

(i)

acquisition,

(ii)

construction (including where appropriate manufacture),

(iii)

refurbishment,

(iv)

fitting out,

(v)

alteration, or

(vi)

extension (including the construction of an annex).

(4)

The value for the purposes of paragraph (3) is--

(a)

not less than £250,000 where the item falls within paragraph (2)(a), (b)

or (c);

(b)

not less than £50,000 where the item falls within paragraph (2)(d), (e)

or (f)."

[25]

The appellant did not account to the respondents for VAT output tax on the supply

to Cumbernauld. On 25 November 2016 the respondents issued him with a decision notice

and notice of assessment that VAT of £191,562 was due in respect of the supply and that his

VAT return of 09/14 had been underdeclared in that amount. The assessment treated the

purchase price of £1,149,374.35 as a VAT inclusive figure (viz. an output of £957,812.35 and

VAT of £191,562). On 7 December 2016 the respondents issued a confirmation notice of

assessment confirming that VAT of £191,562 was due together with a further sum of

£11,491.10 by way of default interest. On 22 December 2016 the appellant sought a review of

the decision. The letter seeking a review was written by Graeme Murdoch, the appellant's

financial controller. The letter stated, inter alia: "The property was expected to be a Capital

Goods Scheme item for the purchaser." The respondents issued the review decision on 16

March 2017. It upheld the decision notice. The appellant appealed to the First-tier Tribunal

(Tax Chamber) ("the FtT"), who dismissed the appeal. He appealed to the Upper Tribunal

(Tax and Chancery Chamber) ("the UT") who dismissed the appeal on 12 March 2020. On 4

June 2020 the UT also ordered the appellant to pay the respondents £12,524.00 in respect of

the expenses of the appeal to the UT. The appellant now appeals to this court against both

of the UT's decisions.

[26]

The appellant maintains that the UT erred in law in holding that the supply to

Cumbernauld was taxable. It is common ground that the appellant was the "grantor" in

respect of that supply (VATA, Schedule 10, paragraph 13(2)), but that at the time of the grant

the property was not a capital item in relation to him because more than 10 years had

elapsed since he purchased it (Schedule 10, paragraph 13(3), (6) and VATR, reg 114(3)). It is

agreed that Cumbernauld was a "relevant transferee" because the property was to be

transferred to it in the course of the supply (VATA, Schedule 10, paragraphs 13(4) and

13(5)(a)). It is also agreed that the exempt land test is met. The issue is whether the grant by

a developer condition was met. In the present case that turns on whether the appellant

intended or expected that the property would become a capital item in relation to

Cumbernauld (VATA, Schedule 10, paragraph 13(4)). If he did, then it is accepted that the

grant would have been made at an eligible time as respects that capital item.

[27]

The parties are agreed that if the appellant succeeds in the main appeal he should

also succeed in the expenses appeal; but that if he loses the main appeal he should also lose

the expenses appeal.

The FtT's decision

[28]

The FtT held (paragraphs 33 - 34) that it was the appellant's subjective intention or

expectation at the time of the supply to Cumbernauld which was critical. It reasoned

(paragraph 36) that Cumbernauld would only incur "VAT bearing capital expenditure" in

terms of regulation 113(1) of VATR if VAT was charged on the expenditure incurred

acquiring the property.

[29]

Before the FtT the appellant and the respondents each proceeded on the basis that,

read literally, paragraph 13(4) was circular where the subject of the supply is no longer a

capital item for the grantor but will be a capital item for the transferee if it is intended or

expected that VAT would be charged on the capital expenditure incurred on acquisition.

The FtT described the circularity at paragraph 4 of its decision:

"4. ...(T)he circularity can arise where a taxpayer wishes to sell an opted building, or

land, but at the point of sale the building or land is not a capital item in the Capital

Goods Scheme ("CGS") for the seller. However, if the sale price exceeds £250,000 and

is subject to VAT because of the option to tax, it has the potential to become a capital

item in the hands of the purchaser and that is relevant in terms of the legislation. In

circumstances such as where the "exempt land test" ... is met the seller's option to

tax is potentially disapplied rendering the supply exempt. However, that can result

in circularity since, if the supply is no longer taxable ... a capital item in the CGS

would not be created and therefore the supply then becomes taxable."

The circularity issue is also discussed in Scammell, VAT on Construction, Land and Property,

paragraph H16.4.4. Both parties agreed that paragraph 13(4) required to be construed so as

to avoid circularity. Counsel for the appellant's submission was that the answer was for the

appellant's intention or expectation to be assessed ignoring any disapplication which

paragraphs 12-17 might effect. Counsel for the respondents resisted that solution. He

maintained that the way forward was to construe paragraph 13(4) in the way set out in

"VATLP23500 Option To Tax, Anti-Avoidance Test: How does the anti-avoidance test work

in practice" at Example 5, viz.:

"To avoid circularity the CGS [Capital Goods Scheme] 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".

[30]

The only discussion by the FtT of the respondents' suggested construction comes in

paragraph 20:

"20.

Two points arise out of that. Firstly, that is simply HMRC's interpretation of

the position and, secondly, and more pertinently for this appeal, Scammell points out

that that and the following example were only added in 2017 which is some years

after the transaction with which we are concerned."

However, it is implicit in the FtT's reasoning that it rejected the respondents' construction.

If the supply to Cumbernauld could never have qualified as a grant by a developer then

there would have been no need for the FtT to ascertain the appellant's intention or

expectation at the time of the grant.

[31]

It is also clear that the FtT rejected counsel for the appellant's construction

(paragraphs 41 and 42); and that in identifying the appellant's intention or expectation at the

time of the grant it concluded that the appellant would have known that the supply would

be exempt because paragraphs 12-17 would disapply the option to tax.

[32]

Paragraphs 24 - 43 of the FtT's decision are headed "The approach to the legislation

based on the facts in this case". At paragraph 27 the FtT adopted the analysis of the statutory

provisions set out by Judge Falk (as she then was) in PGPH Limited v Revenue and Customs

Commissioners [2017] UKFTT 782 (TC), [2018] SFTD 546, at paragraphs 8 to 10. However, the

crux of the FtT's approach is contained in paragraph 28 of its decision:

"28.

Taking matters linearly and chronologically, a prudent taxpayer who had

opted to tax, would first assume that tax would be levied on any supply of the land

but would then have to check if the supply fell into one of the restricted categories"

The FtT continued:

"33.

Returning to paragraph 13(4) the issue therefore is whether or not th e

appellant could have intended or expected that the property would become a capital

item in the purchaser's hands. We agree, again, with Judge Falk in PGPH at

paragraphs 116 to 118 where she states:

`116. It is clear that the references to intention or expectation in paragraphs

13(2) and (4) of Schedule 10 impose a subjective test. For the test to be

satisfied the relevant person... must have had an intention or expectation at

the date of the grant...

117.

It is not the case that the capital item must exist at the date of the

grant....

118.

There is no indication ...that Parliament only intended the rules to

apply if the land did become a capital item...'

In summary, it is a subjective test, as to what would be a genuine or real, not a

hypothetical, intention or expectation as at the time of the grant.

...

36.

The phrase `VAT bearing capital expenditure' is defined at Regulation 115(3)

as being capital expenditure at the standard or reduced rate. The purchaser would

only incur VAT if VAT was charged on the supply of the property. Therein lies the

problem.

37.

The appellant correctly, and conscious of its obligations in terms of VATA,

considered the relevant taxing provisions. The starting point is that having opted to

tax, the supply should bear tax. However, it can only do so if the option to tax is not

disapplied. That is the relevance of the provisions of Schedule 10.

...

40.

Mr Simpson argues that in order to avoid circularity, having decided that the

transaction was `caught' by Schedule 10, the process should stop at that point.

41.

As we indicate at paragraph 16 above, we find that although labelled `anti-

avoidance' the purpose of Schedule 10 is not limited to that and the purpose is rather

to limit the circumstances where the option to tax can be used. Accordingly, we do

not accept the ingenious argument advanced by Mr Simpson that when looking at

anti-avoidance in the context of a taxpayer's intentions one must assess the position

before the anti-avoidance provisions come into play...

42.

We have some difficulty with his proposition that the process comes to a halt

once it is established that the transaction is exempt in that that would mean that in

cases where the sale price of the land and buildings was over £250,000 and the

relevant person occupying it met the `exempt land test' there would be no charge to

tax. Although the purpose of the legislation is to limit the circumstances in which

the option to tax can be deployed it is also aimed at anti-avoidance and to implement

that approach would be to encourage the avoidance of tax.

43.

As a matter of fact, we find that at the date of the grant the appellant knew

that the supply would not be, and could not be, taxable. Accordingly, given the

terms of Regulation 113(1) of the VAT Regulations ..., and knowing that no other

relevant expenditure was likely, the appellant could not have intended or expected

that the property would become a capital item in the hands of the purchaser.

Decision.

44.

We observe that the general tenor of European VAT law is to make more

supplies taxable and minimise exemptions. The unfortunate drafting of these

legislative provisions can achieve the opposite result rendering a normal commercial

transaction, where there is an option to tax, exempt. The circularity is to be deplored.

However, in this case, we find that the disapplication provisions are not engaged and

we must therefore dismiss the appeal for the reasons given."

The UT's decisions

[33]

Before the UT counsel for the appellant submitted that the FtT had been wrong to

reject the submission that the consequences of schedule 10, paragraphs 12-17 being

applicable had to be left out of account when examining whether a grantor intended or

expected that the transferee would incur VAT bearing capital expenditure. He also

submitted that the letter of 22 December 2016 from Mr Murdoch stated that at the time of the

grant the property had been expected to be a Capital Goods Scheme item for the purchaser .

Rather than proceed on the basis of that evidence the FtT had reasoned that the appellant

should be taken to have known that paragraphs 12-17 would disapply the option to tax; and

therefore that Cumbernauld's acquisition cost would not be VAT bearing capital

expenditure and the property would not become a capital item in the hands of

Cumbernauld. Counsel for the respondents renewed the submission he had made to the FtT

that the approach to adopt to avoid circularity is that the reference to the creation of a capital

item in relation to the transferee must be a reference to a capital item other than the one

which would arise on the grant. He submitted that the disapplication of the option to tax

provisions is intended to prevent the inappropriate recovery of input tax (Principal and

Fellows of Newnham College in the University of Cambridge v Revenue and Customs Commissioners

[2006] EWCA Civ 285, [2006] STC 1010, Chadwick LJ at paragraph 29). It was not

appropriate to look at Mr Murdoch's letter. While it had been in the Joint Bundle, it had not

been an agreed document and no evidence in relation to it had been adduced.

[34]

Like the FtT, the UT rejected the appellant's suggested construction. It said nothing

about the respondents' proposed construction, but once again it seems implicit that it did

not accept it. It held (paragraph 29) that the intention or expectation of the grantor was to be

determined at the date of the grant, and that on the evidence before it the FtT was entitled to

find "that the Appellant could not have intended or expected that the property would

become a capital item in the hands of the purchaser" (paragraph 38). It continued:

"39.

... On the facts of this appeal, the only expenditure that could make the

property a capital item is on the acquisition but no VAT was charged and there was

no evidence before the F-tT that the Appellant had any intention or expectation that

the property would become a capital item in the hands of the purchaser... That

requirement cannot be met when the grantor knows that the invoice issued will treat

the grant as exempt.

40.

We reject the Appellant's submission that the F-tT made findings of fact as to

the Appellant's knowledge of the relevant provisions. It is clear that the F-tT's

approach applied the test by reference to the Appellant's knowledge as to the facts of

the transaction and not by reference to his knowledge of the statutory provisions...

[T]he F-tT ... was entitled to reach the conclusion, on the basis of the agreed

evidence, as to the Appellant's intention or expectation by reference to the facts of

the supply...

41.

Our conclusion is fortified by a consideration of the potential for tax

avoidance were we to decide otherwise. We agree with the F-tT at [42]... [the terms

of paragraph 42 were quoted].

42.

It seems to us that in reaching its Decision, the F-tT applied the correct

interpretation in its application of the law to the facts and bore in mind the object for

which the provisions were enacted. In our view the F-tT correctly identified the test

and applied it to the evidence; the submissions on behalf of the Appellant did not

persuade us to the contrary."

The UT held that it was not legitimate for the appellant to found on Mr Murdoch's letter . If

the UT had had regard to it it would have given it little weight because it was not

contemporaneous with the grant; it was Mr Murdoch's view rather than the appellant's

view; and its context was a challenge to the respondents' decision .

[35]

It is clear that the UT agreed with the FtT that it was appropriate to consider whether

the grantor foresaw disapplication when determining the appellant's intention and

expectation at the time of the grant.

The appellant's submissions

[36]

Counsel for the appellant submitted that the parties had treated the matter in issue as

being a dispute which fell to be resolved by the FtT deciding which of the rival constructions

of paragraph 13(4) of Schedule 10 was correct. There had been a statement of agreed facts

and a joint bundle of documents. Neither party had led oral evidence.

[37]

Somewhat to the appellant's surprise the FtT had not favoured either party's

construction of paragraph 13(4). On the FtT's reading of the provision, if at the time of the

grant the grantor intended or expected that the option to tax would be disapplied by

paragraphs 12-17 then he did not intend or expect the property supplied would become a

capital item in relation to the transferee. Accordingly, the grant by a developer condition

was not satisfied.

[38]

The FtT, and in its turn the UT, had erred in law. Each tribunal ought to have

accepted that for the purposes of paragraph 13(4) the granter's intention or expectation

required to be determined leaving out of account any intention or expectation that the anti-

avoidance provisions would disapply the option to tax and render the supply exempt.

Otherwise paragraph 13(4) was circular. A necessary step on the way to concluding that the

option to tax was disapplied was that the grant by a developer condition was satisfied. The

grantor could only have expected or intended the option to tax would be disapplied by

paragraphs 12-17 if he had intended or expected that the property would become a capital

item in the hands of Cumbernauld. Mr Murdoch's letter confirmed that at the time of the

grant the appellant intended or expected the property to become a Capital Goods Scheme

item in relation to Cumbernauld. It made no sense at all for the FtT to say that the anti-

avoidance provisions were not engaged because the appellant must have intended or

expected that they would be. If he intended or expected that they would be engaged it

could only have been on the basis that the grant by a developer condition was satisfied.

[39]

The respondents' suggested construction had not been accepted by the tribunals. In

any case it was not a tenable construction. No support for it could be garnered from the

language of paragraph 13(4) or regulation 113, and indeed in some respects it conflicted with

those provisions. Thus, for example, in the cases of land (VATR, reg 113(2)(a)) or a

computer or item of computer equipment (VATR, reg 113(2)(d)), the only possible relevant

capital expenditure is acquisition expenditure (VATR, reg 113(3)(a)).

[40]

Paragraphs 12-17 of Schedule 10 are anti-avoidance provisions which should be

construed broadly rather than narrowly (cf. Principals and Fellows of Newnham College,

Cambridge v HMRC [2008] 1 WLR 888, [2008] STC 1225, per Lord Hoffmann at paragraph 15).

The appellant's construction of paragraph 13(4) accords with that principle. It gives the

provision a wider ambit than the tribunals' construction or the respondents' suggested

construction do.

[41]

The FtT's findings in paragraph 43 were based on an incorrect view of the law. On a

proper construction of paragraph 13(4) those findings could not stand. The appeal should

be allowed and the assessment to VAT on the supply should be quashed. Failing which, at

the very least, the appeal should be allowed and the case should be remitted to the FtT so

that, properly instructed by the court as to the law, it could make findings in fact which

were soundly based.

The respondents' submissions

[42]

Counsel for the respondents submitted that the appeal should be refused. In his

submission there was a short answer and a longer answer to the grounds of appeal.

[43]

The short answer was that it was clear from the FtT's findings in fact that the

appellant had failed to prove that at the time of the grant he had intended or expected that

the property would become a relevant capital item in relation to Cumbernauld. In

paragraph 43 the FtT found that at the date of the grant the appellant knew that the supply

would not be, and could not be, taxable; and that he could not have intended or expected

that the property would become a capital item in relation to the purchaser. Those findings

were consistent with the fact that the appellant treated the supply as being exempt - he did

not invoice Cumbernauld for VAT. He had not led evidence about his intention or

expectation at the time of the grant. While Mr Murdoch's letter had been in the joint bundle,

it had not been adduced in evidence. Even if it had been open to the FtT to consider it, the

FtT had not chosen to make findings which reflected the terms of the letter. The UT had

been entitled to take the approach which it had taken in relation to the letter. There was no

error of law on the part of the FtT or the UT.

[44]

Reliance only required to be placed on the longer answer if the short answer was

incorrect. The longer answer was that the respondents' construction of paragraph 13, and in

particular paragraph 13(4), should be preferred to the appellant's construction.

[45]

Paragraphs 12-17 are anti-avoidance provisions. Their purpose is to preserve the

basic principle that an exempt business should bear input tax on supplies made to it; it

should be denied the opportunity to obtain a VAT credit in respect of such input tax

(Principals and Fellows of Newnham College, Cambridge v HMRC [2006] EWCA Civ 285,

[2006] STC 1010, Chadwick LJ at paragraph 29). The provisions should be construed with that

legislative purpose in mind. The respondents' construction is consistent with that legislative

purpose. On the other hand, the appellant's construction involves founding upon anti-

avoidance provisions in order to avoid accounting for output tax - an arbitrary and

anomalous result (cf. R (Edison First Power Ltd) v Central Valuation Officer [2003] UKHL 20,

[2003] 4 All ER 209, Lord Millett at paragraph 116; Bloomsbury International Ltd and others v

Department for Environment, Food and Rural Affairs (Sea Fish Industry Authority intervening)

[2011] UKSC 25, [2011] 1 WLR 1546, Lord Mance at paragraph 10).

[46]

When construing "capital item" for the purposes of paragraphs 13(4), 13(8), and

13(9), the words "VAT bearing capital expenditure" in regulation 113 do not have their

ordinary meaning. In the special context of their application to paragraph 13 (but only in

that context) they should be construed as referring to expenditure incurred otherwise than

in respect of the grant itself. In other words, in order to avoid circularity in paragraph 13(4)

the capital goods item created by the grant must be ignored when deciding whether the

option to tax is disapplied by the anti-avoidance provisions. Land could only be expected or

intended to be a relevant capital item in relation to a transferee if it was intended that

relevant VAT bearing capital expenditure would be incurred subsequent to the transfer. The

intention or expectation had to involve the creation of a relevant capital item at some time

after the date of the grant. It could not relate to a capital item which was created by the

grant.

[47]

By contrast, the appellant's construction would result in the words "intended or

expected" being devoid of content because at the time of the grant the grantor would be

likely to know whether the land supplied would be a capital item in relation to the

transferee - it would not be a matter of intention or expectation.

Decision and reasons

[48]

I regret that I disagree with your Lordships in relation to the outcome of this appeal.

In my opinion the FtT and the UT fell into error. I have considerable sympathy for both

tribunals. The issue of construction which they had to resolve is a difficult one.

Construction of paragraph 13(4)

[49]

It was common ground that the relevant transferee limb of paragraph 13(4) is not

easy to construe, but that it requires to be interpreted so as to avoid circularity.

[50]

It is implicit in the reasoning of both the FtT and the UT that the tribunals did not

accept the respondents' proposed construction. In any case, in my view that construction is

untenable. It is not the ordinary and natural reading of paragraph 13(4) and regulation 113;

indeed it is at odds with an ordinary reading of regulation 113(2)(a) and regulation

113(2)(d). I am not convinced that regulation 113 ought to be given the special interpretation

which the respondents suggest. Nor do I find persuasive the suggestion that the intention or

expectation test in paragraph 13(4) is devoid of content unless the respondents' construction

is correct. The language of the provision (and, in particular, the words "would become a

capital item") appears to me to be apt to encompass capital items created at the date of the

grant or at a later date.

[51]

Provided that it is accepted that the punctum temporis is the time of the grant as

opposed to some time before it, the appellant's construction is an available construction of

paragraph 13(4). It is a sensible construction which avoids the circularity which would arise

if account were to be taken of an option to tax being disapplied because the grant by a

developer condition was satisfied.

[52]

The tribunals rejected the appellant's construction. They proceeded on the basis that

the appellant believed that the option to tax would be disapplied. Plainly, he did. No

element for VAT was identified as being part of the price to be paid by Cumbernauld, and

the appellant did not include output tax in respect of the supply in his VAT return.

However, in my opinion a necessary and integral element of the appellant's belief that the

option would be disapplied was his belief that the grant by a developer condition was

satisfied, viz. that he intended or expected that the property would become a capital item in

relation to Cumbernauld. In my view these two matters are inextricably linked, and the

tribunals erred in losing sight of that.

[53]

If the tribunals' construction is correct it would have very odd consequences. Where

all other requirements for disapplication of the option to tax were satisfied, whether there

was disapplication would turn on whether or not the grantor intended or expected it to

occur. If he did, there would not be disapplication. If he did not, there would be. That

seems both arbitrary and absurd. I do not consider that it can have been the legislative

intention.

[54]

In my opinion purposive considerations do not favour the tribunals' construction. It

would give the relevant transferee limb of paragraph 13(4) a very narrow scope - much

narrower than on the appellant's construction (cf. the FtT's (erroneous) view at paragraph 22

of its decision). That consequence is very difficult to reconcile with the fact that

paragraph 13(4) is an anti-avoidance provision and, as such, should be construed so as to

have a broader rather than a narrower effect (cf. Principals and Fellows of Newnham College,

Cambridge v HMRC [2008] 1 WLR 888, per Lord Hoffmann at paragraph 15). The provisions

in paragraphs 12-17 are directed towards preserving the basic principle that an exempt

business should bear input tax on supplies made to it by being denied the opportunity to

treat that input tax as an allowable VAT credit (Principals and Fellows of Newnham College,

Cambridge v HMRC [2006] EWCA Civ 285, [2006] STC 1010, Chadwick LJ at paragraph 29).

Prima facie, where the provisions are satisfied disapplication of the option to tax advances

that purpose - there is nothing anomalous about that. Of course, the breadth of the

provisions has the consequence that they will strike at some transactions which do not have

the aim of avoiding or mitigating VAT liability as well as at transactions which do have that

aim, but that is not a good reason to decline to construe them as having a broader rather

than a narrower effect. In my view both tribunals misunderstood the true purpose of the

provisions, and this led them into error. At paragraph 42 of its decision the FtT reasoned:

"Although the purpose of the legislation is to limit the circumstances in which the

option to tax can be deployed it is also aimed at anti-avoidance and to implement

[the appellant's] approach would be to encourage the avoidance of tax."

At paragraph 41 of its decision the UT agreed with that reasoning and observed that its

conclusion was fortified by a consideration of the potential for tax avoidance were it to

decide otherwise. Both tribunals treated (i) the purpose of limiting the circumstances in

which the option may apply, and (ii) the purpose of anti-avoidance, as being opposing

purposes, when in fact disapplication of the option to tax is the means by which the

legislative anti-avoidance purpose is to be achieved.

[55]

It follows for the foregoing reasons that in my opinion the FtT and the UT erred in

law in their construction of paragraph 13(4) and in their application of that provision to the

facts.

[56]

In my view the respondents' "short answer" does not circumvent the tribunals'

errors. The FtT's crucial findings were predicated upon its erroneous approach. The FtT's

error engages the first, second, and possibly the fourth of the principles discussed in the

opinion of the court delivered by Lord Drummond Young in Advocate General for Scotland v

Murray Group Holdings Ltd 2016 SC 201 at paragraphs [42] - [43]. I am not persuaded that

had the FtT directed itself correctly there would have been no proper basis upon which it

could have concluded that the grant by a developer test was satisfied. First, Mr Murdoch's

letter was among the documents which were before the FtT and its wide powers under the

Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 gave it very considerable

scope as to how it dealt with its contents. The force of that point is not undermined by the

UT's obiter view that it would have given the relevant statement in the letter little weight: the

context in which that view was expressed was the UT's erroneous approach to the

construction issue and its resulting error when it applied that construction of paragraph

13(4) to the facts. Second, and even more fundamentally, the FtT (and in its turn the UT)

proceeded on the basis that at the time of the grant the appellant knew that the supply

"would not be, and could not be, taxable" because the option would be disapplied. Since

such disapplication was dependent upon the appellant intending or expecting that the

property would become a capital item in relation to Cumbernauld, it is difficult to see how

the FtT could posit disapplication without also positing satisfaction of the grant by a

developer test. The two were inseparable. Finally, it is not without significance that before

the FtT both parties "agreed that the sole issue for determination by the Tribunal was the

interpretation of the relevant provisions of Schedule 10 VATA because of the admitted

circularity caused thereby" (paragraph 3 of the FtT's decision). The subsumption appears to

have been that if the appellant's construction was correct he should succeed whereas if the

respondents' construction was correct the appeal should be refused.

[57]

I would have allowed the appeal and remitted the case to the FtT to reconsider it in

light of the correct approach to paragraph 13(4).

Scottish Court of Session Decisions