19111

Value Added Tax – sale of commercial building to housing association for conversion into residential flats – “option to tax” having been exercised by seller – whether purchaser can restore exemption by retrospective certificate – VATA 1994, Schedule 10, Paragraph 2(1) and (3) and Schedule 8, Group 5, Note (12) – Appeal refused.

EDINBURGH TRIBUNAL CENTRE

	LANGSTANE HOUSING ASSOCIATION LIMITED	Appellant

	- and -

	HER MAJESTY’S REVENUE & CUSTOMS	       Respondents

			Tribunal:	 (Chairman):  Mr Kenneth Mure, QC
					 (Members):   Ian M P Condie, CA
							 James D Crerar, WS., NP

Sitting in Edinburgh on Monday 9 May 2005

for the Appellant		Mr Bill Saunders

for the Respondents	Mr Andrew Scott, Shepherd & Wedderburn, WS

© CROWN COPYRIGHT 2005.

DECISION

Introduction
In this appeal the Langstane Housing Association Limited was represented by Mr Bill Saunders, Regional VAT Manager, Baker Tilly.  The Commissioners of Revenue & Customs were represented by Mr Andrew Scott, Solicitor, Shepherd & Wedderburn, WS.

The Appellant is a Housing Association and purchased commercial premises at 682 King Street, Aberdeen.  These had been the subject of an “option to tax” at the instance of the seller with the result that the sale to the Appellant was not “exempt” but, rather, standard-rated to VAT.

The nub of the dispute is whether the Appellant can issue retrospectively a certificate revoking the “option to tax” in terms of VATA 1994 Schedule 10 Paragraph 2(3) with the effect that the sale of 682 King Street becomes “exempt” for VAT purposes.

The Respondents refused to allow the Appellant to serve such a certificate retrospectively by their letter dated 29 May 2002 (Document 5) and as subsequently confirmed.  The Appellant now appeals against that refusal.  

The Law
The appeal proceeds in terms of Section 83(c) VATA.

In terms of Section 31 and Schedule 9 of the Act sales of land and interests in land are exempt for VAT purposes.  However, by reason of Article 13 of the Sixth Directive a seller of land is enabled to elect to waive the exemption and exercise an “option to tax”.  Reference may be made to Section C and Section B(g) and (h) thereof.  The option is provided for in terms of Schedule 10 Paragraph 2 of the Act.  However, Sub-paragraph (3) thereof enables a purchaser to issue a certificate to the grantor with the effect of restoring exempt status to the transaction.  It provides:

“(3) Sub-paragraph (1) above [i.e. the “option to tax”] shall not apply in relation to a grant if – 

(a) the grant is made to a relevant housing association and the association has given to the grantor a certificate stating that the land is to be used (after any necessary demolition work) for the construction of a building or buildings intended for use as a dwelling or number of dwellings or solely for a relevant residential purpose; …”

Schedule 10, Paragraph 9 of the Act applies in this context inter alia Note (12) to Group 5 of Schedule 8 to the Schedule.  Note (12) provides – 

“(12) where all or part of a building is intended for use solely for a relevant residential purpose or a relevant charitable purpose – 

(b) a grant or other supply relating to the building (or any part of it) shall not be taken as relating to a building intended for such use unless before it is made the person to whom it is made has given to the person making it a certificate in such form as may be specified in a notice published by the Commissioners stating that the grant or other supply (or a specified part of it) so relates.”

In the course of the Hearing reference was made to the decision of the Tribunal in SEH Holdings Ltd (LON/98/1362) which relates to the interpretation of Sub-paragraph 2 (2) of Schedule 10.

The Facts
Parties concluded a Statement of Agreed Facts which provides:

1.	“On 29 May 1995, George McLennan notified the Respondents of his election to waive exemption (opt to tax) on 652 King Street, Aberdeen, AB2 1SL (“the property”) as from 1 May 1995.  On 1 June 1995, the Respondents confirmed to George McLennan that his election to waive exemption had been recorded in the appropriate register as from 1 May 1995.

2.	On 31 October 2001, the Appellants completed the purchase of the property from George McLennan.  The property was purchased for £350,000, plus VAT of £61,250.

3.	The Appellants applied for planning permission for the erection of 23 flats at the property.  Planning permission was refused by Aberdeen City Council.  The Appellants appealed this decision and planning permission was granted on 21 November 2001.

4.	The property consists of 3 units.  The units have common walls but no internal access to each other.  Each unit has its own separate entrance/exit.

5.	On 31 October 2001, when the property was acquired by the Appellants, the property was occupied by two tenants.  The lease in respect to the first tenant expired on 30 November 2001.  The lease in respect to the second tenant does not expire until 30 June 2005.

6.	On 26 February 2002, the Appellants representative wrote to the Commissioners and sought confirmation that a retrospective certificate could be issued by the Appellants to George McLennan.

7.	On 29 May 2002, the Respondents wrote to the Appellants’ representative advising that it was too late for the Appellants to issue a retrospective certificate.

8.	On 27 June 2002, the Appellants’ representative wrote to the Commissioners requesting a reconsideration of the Respondent’s decision.  Further information was provided by the Appellants’ representative over the telephone on 18 September 2002.  The Respondent requested further information by letter dated 25 September 2002.  The Appellants’ representative provided this further information on 6 November 2002.  The Respondent requested yet further information in a letter dated 22 January 2003.  The Appellants’ representative provided this further information in a letter dated 23 December 2003.

9.	By letter dated 6 April 2004, the Respondent confirmed its decision that the Appellants could not issue a retrospective certificate pursuant to paragraph 2(3) of Schedule 10.  By letters dated 14 April 2004 and 21 September 2004, the Appellant’s representative sought a reconsideration of the Respondent’s decision.  By letter dated 15 October 2004, the Respondent confirmed its decision.

10.	On or about 27 October 2004, the Respondents accepted belated notification from the Appellants of an election to waive exemption (opt to tax) on the property as from 31 October 2001.

11.	The copy correspondence within the Bundle of Documents is a true copy of the original correspondence”.

(In view of the terms of the Statement we observe that at the date of the Appellant’s purchase of the property planning permission was not in place.  Also, the Appellant’s own election to waive exemption, noted in para 10, would have enabled it to reclaim input tax paid at the time of purchase but could have exposed it to a liability to repay some of this were the property to cease to be used for a taxable purpose).

Although the Statement details all the salient facts necessary for our determination evidence was led from 3 witnesses.

Firstly, Mr Saunders led the evidence of Mr Stewart Garrioch, an officer of the Appellant, who generally was responsible for preparing its VAT Returns.  He spoke to his obtaining somewhat contradictory advice from the Respondents’ advice centre subsequent to the purchase (Documents 1, 2 and 3).  He claimed not to have been familiar with the “option to tax” election and its possible revisal in terms of Sub-paragraph 2(3).  He accepted that the Financial Director of the Appellant, Mrs Robertson, might have had greater knowledge of this.  He liaised with her and they confirmed with the Respondents that the input tax was recoverable before deducting it in the relative Return.

Next, Mr Scott led evidence from Mr David Bowie, an assurance officer of the Respondents who had visited the Appellant and spoken to Mrs Robertson.  He confirmed the terms of the Reports of his visits (Document 28).  He believed that Mrs Robertson was reasonably familiar with the “option to tax” and the opportunity for a purchaser to dis-apply this.

The evidence of both of these witnesses was not controversial.  Documents 1, 2 and 3 confirm enquiries made and advice given.  While we accept it as likely that Mrs Robertson had some knowledge from previous transactions of the dis-application of the “option to tax”, we are unable to make any finding as to the extent of her knowledge particularly without hearing her evidence directly.  In any event this aspect is not critical to our decision.

Finally, Mr Scott led evidence also from Mr Russell Harrison, a senior officer of the Respondents in their Reconsiderations Unit in Aberdeen.  He confirmed as correct in his interpretation that the issue of a certificate retrospectively was not permissible in terms of Sub-paragraph 2(3).  He confirmed his authorship of Document 22.  He indicated that any taxpayer must be presumed to know his rights or at least take the responsibility and take advice to ascertain them.  

There was produced in the course of the Hearing an internal memorandum of the Respondents dated 24 March 2004 relating to this dispute (allowed as Document 30).  Perhaps significantly paragraphs 8 and 9 thereof seem to acknowledge the possible acceptance of a retrospective certificate as being within the “spirit” of Paragraph 2(3).  In the context of the present case we observe that the seller’s solicitor indicated in principle his client’s willingness to cooperate in the absence of any adverse repercussions.  (Document 18/2).

It was put to Mr Russell that given the enquiries made of the Appellant in relation to the circumstances of this transaction it must surely have been HM Revenue & Customs’ policy to approve, albeit exceptionally, a retrospective certificate issued under Paragraph 2(3).  Somewhat to our surprise he rejected this even in a situation where the seller would cooperate and where prejudice to the Commissioners could be avoided.  Mr Russell insisted that a retrospective certificate would not be countenanced in any circumstances.  (Of course, the matter of the correct interpretation of Paragraph 2(3) is a question of law for the Tribunal and Courts to determine).

Submissions for Respondents
Mr Scott indicated initially that the Statement of Case fell to be revised in one respect.  The first sentence of Paragraph 19(g) should be deleted and the terms of Paragraph 10 of the Statement of Agreed Facts should be substituted.

Thereafter, and having referred us to the relevant law, Mr Scott submitted that the Appeal should be refused.  The issue involved a short point of interpretation.  Did Paragraph 2(3) allow a certificate to be issued by a purchaser to a vendor retrospectively?  Properly construed, it did not, he argued.  Whereas the preceding Sub-paragraph (2) was mandatory, Sub-paragraph (3) gave an option.  Its wording suggested that the certificate must precede the grant and cannot be construed to allow it to be issued after the grant.  Note 12 to Group 5 of Schedule 8 directed that the certificate must precede the grant.  The legislation, Mr Scott continued, was worded deliberately to protect the vendor.  The vendor must have the opportunity to address the implications of the exact terms of the purchase, including the taxation aspects, beforehand.  He referred us to the terms of the Decision in SEH Holdings Ltd in relation to the preceding Sub-paragraph (2).  Ultimately, Mr Scott submitted, the terms of Paragraph 2(3) itself were sufficient to preclude a certificate being issued retrospectively.

Submissions for Appellant
Mr Saunders submitted that a retrospective certificate could be issued in terms of Paragraph 2(3) and it should be allowed in the present circumstances.  He argued that a retrospective issue was not precluded by that provision.  From the correspondence produced in the Documents it was clear that from February 2002 the Respondents were contemplating such a retrospective certificate as being competent and this was refused only in 2004 after a protracted correspondence during which detailed information had been obtained from the Appellant.  Mr Saunders founded on Document 30 which refers to applying the “spirit” of Paragraph 2(3), acknowledging this particularly in relation to a Housing Association.  He stressed the terms of Document 18/2, viz the seller’s solicitor’s letter indicating willingness in principle to accept such a certificate subject to there being no consequential prejudice.  He indicated in the course of his submissions and in general terms that the Appellant would have cooperated so far as necessary to protect the Respondents’ interests (although, as Mr Scott noted later, there is no formal written offer to this effect). 

Decision
In our view the certificate seeking dis-application of the “option to tax” cannot be issued retrospectively.  We consider that Mr Scott’s argument was well-founded.  The question is purely one of statutory interpretation.  The terms of Schedule 10 Paragraph 2(3) suggest that the certificate is to be given to the grantor before the grant.  The wording “… the grant is made … and the association has given to the grantor a certificate …” bear to indicate that a retrospective certificate was not contemplated.

We consider that Note (12) to Schedule 8 Group 5, which is applied to Schedule 10 by Paragraph 9 thereof, tends to confirm such an interpretation.  Sub-paragraph (b) refers to the giving of a certificate to the person making a grant or supply “before it is made”.

We accept that there is a logic supporting the need for the certificate to precede the grant.  According to Document 18/2, while the seller was prepared to cooperate, he had to be assured that there would be no adverse consequences for himself.  Dis-applying an “option to tax”, so restoring the exemption from VAT on the sale, affects the recovery of input tax.  The consideration for the grant would have to be reviewed against such a changed financial background.  While the decision in SEH Holdings Ltd relates to the preceding Sub-paragraph, it emphasises the need to protect the vendor (see especially paragraphs 27, 28 and 41).  That argument supports the interpretation which we favour that a retrospective certificate is not competent.  The interest of HM Revenue & Customs also arises in this context.

Accordingly we refuse the Appeal.  Having done so, however, we repeat our concern about the apparent divergence between Mr Russell’s view and the more sympathetic approach suggested in Document 30 at Paragraphs 8 and 9 which (given their respective dates) seem to have been the basis for Document 16/2 written by Miss J M Cain of the Respondents to Mr Saunders.  Why did the Respondents continue to negotiate if ultimately no concession could be made in relation to a retrospective notice?  It may be that the interests of both the vendor and the Respondents could have been satisfactorily protected having regard to the terms of Paragraphs 8 and 9 of that memorandum.  The matter of following the “spirit” rather than the correct interpretation of the legislation is not, of course, a proper question for the Tribunal to explore.

Expenses
Mr Scott indicated that in the event of the Respondents succeeding, he did not seek expenses.  Therefore we make no award.

Finally, we would thank both Mr Saunders and Mr Scott for the helpful and detailed manner in which they presented their arguments and for concluding the Statement of Agreed Facts.

MR KENNETH MURE, QC

CHAIRMAN

RELEASE:  8 JUNE 2005

EDN/04/144