Grenane Properties Ltd v Revenue & Customs [2010] UKFTT 192 (TC) (27 April 2010)

DECISION

The Appeal

1. This is an appeal against an assessment to VAT on the sale of a piece of development land. The assessment relates to the VAT period of the Appellant ending 28 February 2007 (02/07) and was notified by a letter from HMRC dated 26 July 2007. The assessment was issued after an inspection by officers of HMRC who determined that, in relation to the sale, the Appellant had failed to charge output tax on a property in respect of which there was an existing option to waive the exemption to VAT. The effect of the review was to turn a repayment return for £11,417 for the relevant period into a payment return of £654,933.60. HMRC say that a valid option to tax was extant at the point when the sale was completed, whereas the Appellant denies that an effective option was ever made. It is the resolution of that factual issue that falls to be determined by this Tribunal and will determine the outcome of this Appeal.

The Facts

2. Grenane Properties Limited ("Grenane") is a company which was set up as a special purpose vehicle to acquire a site at Mombane Road, Letterbreen, County Fermanagh, being comprised in folios FE 80533 and 2759, both County Fermanagh ("the Property"). The company has three directors – Edward (otherwise Eamon) McHugh, Michael McAllister and Brendan Loughran. Both Eamon McHugh and Michael McAllister are chartered accountants. Mr. McAllister, in addition to being a director of Grenane, was also a partner in the firm of ASM Howarth – the firm of accountants instructed by Grenane to look after the tax and VAT affairs of the company. Grenane was registered for VAT with effect from the 1June 2006.

3. The outstanding assessment is based solely on the question whether or not an effective option to waive the exemption to VAT has been made in respect of the Property. If it has, the amended assessment will stand, but if this Tribunal concludes that it has not, then the assessment will fail.

4. The chronology of events upon which this case is based is as follows:

(a) on the 15February 2006 Grenane acquired the Property for £2.28m;

(b) in or around June 2006 Mr. McHugh gave instructions to ASM Howarth in relation to the tax and VAT affairs of the company. Those instructions were relayed in a telephone conversation between Mr. McHugh and Miss. Mary McKenna, an administrative assistant in that firm. The nature of those instructions form the crux of this appeal;

(c) regardless of the exact nature of those instructions, they resulted in the preparation of a form to apply for the registration of Grenane with HMRC (the "VAT1") which was signed by Mr. McAllister (and notably not Mr. McHugh who gave the instruction) on 13 June 2006;

(d) on the 30June 2006 Mr. McAllister, again in his capacity as a director of Grenane, signed a Notification Form for Option to Tax Land and Buildings in relation to the Property (otherwise known as the "VAT 1614 Option to Tax Form" or "VAT 1614");

(e) on the 25 July 2006, ASM Howarth, on behalf of Grenane, sent the VAT application form (ie. the VAT1) and the notification to opt to tax to HMRC (ie. the VAT 1614), together with an accompanying letter from Grenane's solicitors (Messrs. J.G. O'Hare) dated 22June 2006 confirming the identity of the Property;

(f) on the 23 August 2006 HMRC wrote to Grenane at the offices of ASM Howarth (its registered office), regarding the application for VAT registration and requesting further information. Included with that letter was a property questionnaire ("the First Property Questionnaire");

(g) on the 28 September 2006, HMRC's Option to Tax Unit in Glasgow wrote to Grenane with regard to the option to tax the Property, stating that it was "in order" and that the VAT registration unit "[would] now examine your application and notify you in due course of their decision";

(h) on the 4 October 2006 HMRC wrote to Grenane stating that it was unable to proceed with the main VAT registration because it had not received the additional information requested in the 23 August 2006 letter;

(i) the First Property Quesionnaire was duly completed and signed by Michael McAllister on the 9October 2006 and returned to HMRC on that same day. On that form the question about the proposed use or business activity of the Property was left blank. Further in response to the question "Please estimate the value of taxable supplies you expect to make in the next twelve months", the figure of £100,000 was inserted – in manuscript;

(j) on the 10 November 2006 the Property was sold for £3.25m to a company, Braidlea Limited, a company which the Tribunal was told is not registered for VAT. VAT was not charged on that sale;

(k) on 16 November 2006 HMRC wrote to Grenane regarding the VAT registration application, again requesting new information and sending a new property questionnaire ("the Second Property Questionnaire");

(l) on the 19 December 2006 ASM Howarth returned the documents requested by HMRC in its 16 November 2006 letter and, in the Second Property Questionnaire in answer to the question as to the Appellant's intention with regard to the Property, it is stated "Not sure at present". The form specifically contains other options – one of which is the option "[to] develop residential property for sale". That option was not ticked. This form was also signed by Michael McAllister and dated 9 October 2006. Also included with that letter (presumably in error) was a copy residential planning permission but it related to a completely different site;

(m) on 27 January 2007 HMRC sent an acknowledgement of Grenane's election to waive exemption to the Company at ASM Howarth's address;

(n) on 8 January 2007 Grenane was sent the notification of VAT registration;

(o) on 22 January 2007 HMRC wrote to Grenane confirming the Notification of Election to waive VAT in respect of the Property;

(p) on 23 May 2007 HMRC made a routine visit to Grenane;

(q) on 26 June 2007 HMRC sent Grenane an amendment of its return for the period ended 27 February 2007, thereby increasing the output tax by a margin of £568,750 in respect of the sale of the Property. That assessment was raised on the basis that on the evidence before HMRC a valid option to tax was in place and that, therefore, the Appellant ought to have charged VAT on the earlier didspoal.

HMRC's Position

5. The view adopted by HMRC both in relation to the amended assessment and subsequently can be summarised as follows:

(a) that at the time of the sale of the Property the option to waive the exemption was in place and had been confirmed by the correspondence between the parties throughout the relevant period – the majority of which is referred to above;

(b) that in the First Property Questionnaire the Appellant was "not sure" as to the ultimate end use of the Property – contrary to its later assertions;

(c) that (by reference to the additional information sought in respect of the VAT1) that the anticipated taxable supplies of the Appellant would be in the region of £100,000;

(d) that the warning information contained on both the VAT 1614 was entirely clear and, relying on the authority of the case L'Estrange –v- Graucob Limited (1934) 2 KB 394 – namely that the signatory of a contractual document is bound by its terms, irrespective of whether he has knowledge of the actual terms or not – that Grenane was and indeed remains bound by the option;

(e) that was and, indeed in front of this Tribunal, remains HMRC's position.

Appellant's Case

6. The Appellant's case can equally simply be summarised:

(a) that the Property was bought for a residential use, throughout was zoned for residential use and, commercially, could have had no other use but residential;

(b) that in that context any suggestion that Grenane would knowingly have made an application to waive the exemption to tax would make no commercial sense;

(c) that the election, made as it was on the VAT 1614, was made by ASM Howarth through a misunderstanding between Eamon McHugh, as a director of Grenane, and ASM Howarth as the accountants instructed on behalf of the company to undertake VAT registration;

(d) that no valid election could be made where the Appellant had not any actual intention as to the making of that election.

Relevant Law

7. The statutory position which governs the VAT which is chargeable in respect of property is contained in Schedule 9, Group 1; Schedule 8, Group 5 and Schedule 10 of the VAT Act 1994 ("the VAT Act"). An election to waive exemption (referred to more often as the Option to Tax) may be made under paragraph 2(1) of Schedule 10 to the VAT Act:

"(1) Subject to sub-paragraphs (2), (3) and (3A) and paragraph 3 below, 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 person is a body corporate by that person or a relevant associate, would (apart from this sub-paragraph) fall within Group 1 of Schedule 9, the grant shall not fall within that Group."

Paragraph 3(4) of Schedule 10 provides as follows:

"3(4) Subject to sub-paragraph (5) below, an election under paragraph 2 above shall be irrevocable".

Sub-paragraph 6 of Schedule 10 provides as follows:

"(6) An election under paragraph 2 above shall have effect after 1 March 1995 only if:

(a) ……….

(b) in the case of an election made on or after that date:

(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 day on which the election is made, or not later 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 require; and;

(ii) in a case in which sub-paragraph (9) below requires the prior written permission of the Commissioners to be obtained, that permission has been given".

8. The question of whether or not a binding election has been made has been raised many times before, and the Tribunal were referred to a number of cases by both Counsel, namely:

(a) Hammersmith and West London College (Decision No. 17540) ("Hamersmith"));

(b) Windsor House Investments Limited (Decision No. 19666 ("Windsor House");

(d) Blythe Limited Partnership (Decision No., 16011);

(e) Harrison Priddy & Co (a firm) (Decision No. 14089);

(f) Devoirs Properties Limited (Devoirs) (Decision No. 6646).

9. There are a number of principles which arise from the cumulative effect of those decisions – principles to which this Tribunal obviously must have regard.

10. Subsequent to the Blythe Limited Partnership case, it has been accepted law that an election and the notification of that election are two distinct issues. In the present case, it is clear that there has been notification – there is clearly documentary evidence of that – but what remains at issue is whether or not Grenane ever intended to make any election or, therefore, if there was in fact any actual election to notify.

11. Applying then the ratio of Rathbone, if the Appellant is asserting that no valid election was made, it is clear that the burden of proof rests upon the Appellant to prove that that is in fact the case, and then on a balance of probabilities.

12. In line with Harrison Priddy, in looking at that particular question, the Tribunal is entitled to look at all of the relevant facts and evidence and, in particular:

(a) any documentary evidence available to it;

(b) the explanation provided through the testimony of witnesses as to how the election itself came to be notified;

(d) how the property was dealt with after the notification has been made.

It is to that analysis and those questions that we now turn our minds.

Evidence

13. The Tribunal had the benefit of being provided with witness statements and hearing from all of the main people involved, namely:

(a) Mr. Michael McAllister, as the person who signed the relevant VAT forms as a director of Grenane, and also in his capacity as a partner in ASM Howarth;

(b) Mr. Eamon McHugh in his capacity as a director of Grenane, and the person who issued the oral instructions to Mary McKenna of ASM Howarth in relation to the VAT registration of the company;

(c) Mary McKenna as the person who spoke to Eamon McHugh and who, as an administration manager in ASM Howarth, was responsible, in part, for infilling some of the details on both the VAT Registration Form (VAT1) and the Option to Tax Form (VAT 1614); and, finally

(d) Clare Monteith who, at the relevant time, was a senior manager employed by ASM Howarth who had responsibility for supervising Mary McKenna's work and, indeed, who completed those sections of the VAT Forms which Mary McKenna had not herself completed. Mary McKenna remains in the employ of ASM Howarth, but Clare Monteith had, in early 2009 and before this appeal, moved to an alternative position.

The Appellant's Case

14. The following was advanced by the Appellant as the reason why the notification or option to tax had been made. Again, it is probably easiest to look at this chronologically:

(a) in early 2006 the directors agreed to buy the Property. We heard evidence from both Mr. McHugh and Mr. McAllister that this was one of a number of five or six property ventures in which Mr. McHugh, Mr. McAllister and Mr. Loughran had participated. Each separate site was acquired through a separate special purchase vehicle, and evidence was given to the Tribunal that as each opportunity arose one of the directors took primary responsibility in terms of providing or giving instructions to the relevant professional team who would be involved in the acquisition, development and subsequent disposal of the site;

(b) in the present case, evidence was given that Mr. McHugh took that lead role and it was he who then instructed ASM Howarth in relation to the tax affairs and, most germane to this Appeal, its registration for VAT;

(c) Mr. McHugh gave evidence that in June 2006, as he became aware that fees were being incurred for which he would wish to reclaim VAT, he telephoned Mary McKenna in ASM Howarth and asked her to register the company for VAT. Both the witness statement from Mary McKenna and Clare Monteith suggested that that instruction was received on the 17 July 2006, but that date subsequently proved to be inaccurate and, it was further established, arose from a time entry on an electronic timesheet. We do not find that anything turns on that error. Suffice to say that Mary McKenna reported the instruction to Clare Monteith, who then, in turn and according to her witness statement:

"Instructed her [meaning Mary McKenna] to complete a VAT Registration Form (VAT1) and an Option to Tax Form (VAT 1614) and to return those to Clare Monteith when completed";

(d) considerable time was spent both in examination in chief and in cross examination at looking at the relevant forms, namely the VAT1, the Option to Tax Form (VAT 1614) and the Property Questionnaires to identify each of Miss. McKenna's and Miss. Monteith's respective handwritten contributions;

(e) the Tribunal was satisfied that the more straightforward sections were completed by Miss. McKenna, whereas the more complex sections were completed by Miss. Monteith. Miss. Monteith confirmed that she had also completed the Property Questionnaire indicating, in response to the question relating to the ultimate use of the Property the words "not sure at present". Miss. Monteith further indicated that it was she who had inserted the figure of £100,000 as the anticipated taxable supplies. She gave evidence to the Tribunal to the effect that this is the manner in which she would have completed most applications for registration, because in her experience it was a more efficient way of securing their acceptance by HMRC. She confirmed that in neither case did she actually take instructions from Mr. McHugh or, indeed, any of the other directors of Grenane as to the actual intentions of the Company;

(f) Miss. Monteith then explained that the completed forms were then presented to Mr. Michael McAllister. We heard evidence to the effect that at no point were they returned to Mr. McHugh for checking. Had that occurred this unfortunate episode may perhaps have been avoided in its entirety, but it did not happen and we need not speculate further on that omission;

(g) all of the forms placed before him were signed by Mr. McAllister. He, in turn, gave evidence that he relied entirely upon both the input of Miss. Monteith and the instructions given by Mr. McHugh. He did not take time to consider the import of the actual forms or, indeed, question with either Mr. McHugh or Miss. Monteith what instructions had actually been given. Counsel for HMRC suggested that this was perhaps an imprudent way to conduct business, both in his capacity as a director and as a partner in ASM Howarth. Regardless of that observation, the Tribunal does accept that the forms did not receive more than a cursory glance and were, therefore, signed by Mr. McAllister without consideration;

(h) Miss. Monteith was involved in a car accident and was then off work for a couple of weeks. It would seem that the forms were not submitted until her return in late July 2006 Even at that point it would seem that no-one considered the impact that the submission of the VAT 1614 would have;

(i) from the evidence provided by Miss. Monteith it would seem that after their lodgement she then operated on a reactive basis to the First and Second Property Questionnaires submitted by HMRC, again without giving much consideration to their import. That chain of correspondence and submission of Property Questionnaires, again signed by Mr. McAllister, resulted in the confirmation of January 2007, provided by HMRC, that the option to tax had been validly made with an effective date of 29^th June 2006 – obviously being a date prior to the disposal of the Property by Grenane, which had then been completed. All relevant correspondence was directed to Grenane at the offices of ASM Howarth and, therefore, according to Miss. Monteith's evidence, went to her and was filed. It was not seen by the Directors of Grenane;

(j) both Mr. McHugh and Mr. McAllister gave cogent evidence that they did not appreciate that there was an issue until the VAT inspection had been completed and the revised assessment issued. That assessment issued to one of the other senior managers in ASM Howarth, a Mr. P. Cassidy, who both alerted the directors of Grenane, and then entered into correspondence with HMRC in relation to the issue;

(k) both Mr. McHugh and Mr. McAllister gave evidence that the Property, when acquired, was zoned for residential use. Subsequent to acquiring it, a planning application for residential use was submitted on behalf of Grenane and, indeed, a confirmatory letter to that effect from the company's architects had previously been supplied to HMRC and was also made available to the Tribunal. The Tribunal accepts that it is more likely than not, given both the zoning and planning application, that the company intended residential development. In any event the Company did not itself undertake that development, but disposed of the land to a third party in its undeveloped state;

(l) that third party, who coincidentally was the company from whom the Property had originally been acquired, Braidlea Limited, was not registered for VAT;

(m) we were not furnished with a copy of the Contract but must assume that the sale contract did not provide for the recovery of VAT, and evidence was given by Mr. McHugh to the effect that the instructions given to the solicitors who had carriage of the sale were to the effect that the Property was not subject to VAT.

15. The kernel, therefore, of the Appellant's case rests on:

(a) the fact that neither Mr. McAllister, nor Mr. McHugh, had any intention to elect to waive the exemption;

(b) the evidence of those most intimately involved in connection with the administration of the registration of the company, and the lodgement of the subsequent option to tax, to show how the mistake of notification arose;

(d) that, in summary, given the nature and type of the Property involved, that any such registration would have been futile;

(e) that, when taken cumulatively, the net effect was to nullify the notification on the basis that it had been made without there ever having been a valid election by the Appellant.

16. As I have already indicated, HMRC's contrary view is that both Eamon McHugh and Michael McAllister were both authorised to bind Grenane and that in signing both the election and the property questionnaires that they should be taken to have intended to consequences that result from submission of those forms – again based on the principles enshrined in L'Estrange v Graucob. As in other similar cases in which issues of this type have been raised, HMRC emphasised:

(a) the existence of warning notices contained in the VAT 1614 in particular;

(b) the absence of specific written instructions and/or file attendance note on ASM Howarth's file to confirm or rebut what actual instructions were given to Miss. Monteith;

(d) that in terms of the ongoing correspondence with HMRC during the period from the initial submission of the VAT1 and VAT 1614, that the Tribunal should not be convinced that Grenane simply was negligent in failing to appreciate the significance of what was ongoing;

(e) that in subsequent letters, after the assessment was raised, ASM Howarth continued to use, in connection with the option to tax, language that it had been made "following a request from the directors" (a quote from an ASM Howarth letter of the 16 July 2007).

Decision

17. As we acknowledged at the beginning of this decision, the law, as it currently stands, accepts that an election and the notification of that election are two separate and distinct acts. In the present case it is clear that a notification was made.

18. The Tribunal accepts that, in the context of this particular site, that election made no commercial sense. The Tribunal also accepts that the Appellant did not treat the Property as VAT elected after the notification had been made.

19. What the Tribunal must establish however is whether or not an election was ever made by the Appellant. To our mind the concept of an "election" – to give it its natural meaning – requires positive intent.

20. Taking all of the evidence adduced to it, the Tribunal considers that there was no such intent. We find and accept that there was a clear misunderstanding between Eamon McHugh, as the director of Grenane empowered with the organisation of the matters pertaining both to the company and the development of the land, in terms of the instructions which he gave to Mary McKenna. It was clear from the evidence provided to the Tribunal by both Mary McKenna and Clare Monteith, whom the Tribunal found to be compelling witnesses, that that mistake arose from a break down in communication between the two of them and was simply compounded in relation to the administrative processes which they adopted as between themselves in relation to the completion of the forms and the procurement of Mr. McAllister's signature. No thought appears to have been given by either as to the effect of the forms which they were completing would have in relation to Grenane as their client. The fact that all subsequent correspondence was addressed to and went straight to Miss. Monteith simply meant that any chance of the mistake being discovered was removed.

21. Had this been an arms length transaction, it is more likely than not that the forms would have been submitted to and/or correspondence reviewed by the instructing principal who, we find, in all probability might have uncovered the error. In the circumstances prevailing, because of the uniquely close association between Grenane and Mr. McAllister, as Miss. Monteith's supervising partner, the forms were simply presented to him for signature. This Tribunal accepts that those forms were signed without him giving them adequate consideration and relying, albeit erroneously, that the respective input of Mr. McHugh and Miss. Monteith was sufficient to ensure their correct completion.

22. The Tribunal also accepts that the First and Second Property Questionnaire may not necessarily have alerted Mr. McAllister's concern. We accept Miss. Monteith's evidence that it is the case that such forms sometimes are submitted in relation to the registration of the company and not just in relation to the option to tax.

23. As I indicated above, the question for this Tribunal is a factual one. Did Grenane Properties Limited have the intention to waive the exemption to VAT? It is clear from the authorities to which we have referred that the burden of proof is on Grenane, and then on a balance of probabilities, to satisfy this Tribunal that it had no such intent.

24. Based on the evidence and the factual matrix which we have set out at some length above, and the testimony of everyone involved in the submission of the forms given in both examination in chief and cross examination, we have concluded that Grenane did not have the requisite intention to elect to waive the exemption to VAT in this particular case, and that the notification itself arose entirely through an unfortunate series of misunderstandings and poor communication between all relevant players. The statute is quite clear in making reference to an "election" that suggests to us that it requires a positive intent. We do not on the facts of this case find that such a positive intent existed within the Appellant at the relevant time and, therefore, allow the appeal.

25. No order as to costs.

26. This decision contains a full written statement of findings and reasons for the purposes of Rule 35(b) of the Tribunal Procedure rules 2009.

First-tier Tribunal (Tax)

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (VAT) Respondents

IAN HUDDLESTON

TRIBUNAL JUDGE

RELEASE DATE: 27 April 2010

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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Grenane Properties Ltd v Revenue & Customs [2010] UKFTT 192 (TC) (27 April 2010) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2010/TC00494.html Cite as: [2010] UKFTT 192 (TC)