APPEALS BY DAVID MOULSDALE, trading as MOULSDALE PROPERTIES AGAINST THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS

Factual and Procedural Background

In May 2001, the Appellant purchased commercial office premises in The City, opting to tax the land for VAT purposes. The property was leased to a connected company, which supplied exempt services. In 2014, the Appellant sold the property to a third-party company that was not VAT registered, without charging VAT on the sale. The Respondents contended that VAT was due on the supply, issuing a decision notice and assessment. The Appellant challenged this, leading to appeals before the First-tier Tribunal (FtT), the Upper Tribunal (UT), and ultimately this Court. Both the FtT and UT dismissed the Appellant’s appeals, and the Appellant now appeals those decisions.

Legal Issues Presented

1. Whether the Appellant intended or expected the property to become a "capital item" in the hands of the purchaser at the time of the grant, as required under Schedule 10, paragraph 13(4) of the Value Added Tax Act 1994.
2. Whether the anti-avoidance provisions in Schedule 10, paragraphs 12 to 17, disapply the Appellant’s option to tax, rendering the supply exempt from VAT.
3. The correct construction and application of the "grant by a developer" condition and the "exempt land test" within Schedule 10 concerning the supply of land subject to an option to tax.

Arguments of the Parties

Appellant's Arguments

• The Appellant contended that the FtT and UT erred in law by rejecting the submission that the grantor’s intention or expectation should be assessed excluding any intention or expectation that the anti-avoidance provisions would disapply the option to tax.
• The Appellant argued that this exclusion avoids circularity in the statutory provisions and that the letter from the Appellant’s financial controller confirmed the intention or expectation that the property would be a Capital Goods Scheme item for the purchaser.
• The Appellant maintained that the anti-avoidance provisions should be construed broadly, consistent with their purpose, and that the tribunals misunderstood the true purpose of the provisions.
• In the absence of a correct legal construction, the Appellant requested the appeal be allowed or, alternatively, remitted to the FtT for reconsideration based on proper legal directions.

Respondents' Arguments

• The Respondents submitted that the appeal should be refused based on the FtT’s findings of fact that the Appellant failed to prove the requisite intention or expectation at the time of the grant.
• They argued that the anti-avoidance provisions are intended to prevent exempt businesses from reclaiming input tax improperly and should be construed consistently with that purpose.
• The Respondents maintained that the Appellant’s construction was untenable and that the relevant capital item must relate to VAT-bearing expenditure incurred after the grant, not the grant itself, to avoid circularity.
• They submitted that the letter from the Appellant’s financial controller was not evidence before the FtT and should not be given weight.
• The Respondents relied on precedent and legislative purpose to support their interpretation of the statutory provisions.

Table of Precedents Cited

Court's Reasoning and Analysis

The court examined the interplay between the Appellant’s intention or expectation at the time of the grant and the application of the anti-avoidance provisions in Schedule 10 of the Value Added Tax Act 1994. The key issue was whether the Appellant intended or expected the property to become a capital item in the hands of the purchaser, a subjective test established by prior authority.

The FtT had found that the Appellant knew the supply would not be taxable because the option to tax would be disapplied under the anti-avoidance provisions, and thus he could not have intended the property to be a capital item for the purchaser. The UT upheld this factual finding, emphasizing the absence of evidence from the Appellant on his intention or expectation.

The majority of the court agreed that the Appellant failed to discharge the burden of proof on this critical factual issue. It was further noted that the circularity in the statutory provisions was recognized but did not alter the requirement for the Appellant to establish the necessary intention or expectation. The court rejected the Appellant’s argument that the intention test should be assessed ignoring the anti-avoidance provisions, reasoning that the Appellant’s belief in the disapplication of the option to tax necessarily entailed an intention or expectation that the grant by a developer condition was met.

Lord Doherty dissented, finding that the tribunals erred in law by failing to adopt the Appellant’s construction of paragraph 13(4), which avoids circularity and provides a coherent interpretation consistent with the purpose of the anti-avoidance provisions. He considered that the Appellant’s belief that the option to tax would be disapplied was inseparable from his intention or expectation that the property would be a capital item for the purchaser. He would have allowed the appeal and remitted the case to the FtT for reconsideration.

Holding and Implications

The court REFUSED the appeals, upholding the decisions of the First-tier Tribunal and Upper Tribunal.

The direct effect of this decision is that the Appellant must account for VAT on the supply of the property to the purchaser. The anti-avoidance provisions in Schedule 10 of the Value Added Tax Act 1994 were held to apply as interpreted by the majority, and the Appellant failed to prove the requisite intention or expectation that would disapply the option to tax. No new precedent was established beyond affirming the application of existing principles and statutory interpretation in this context.