Moulsdale (t/a Moulsdale Properties) v Revenue and Customs (Scotland)

Factual and Procedural Background

The Appellant purchased commercial premises in The City in 2001 for £1,140,000 plus VAT. Both the vendor and the Appellant had exercised the “option to tax” under Schedule 10 of the Value Added Tax Act 1994 (“VATA”), allowing the Appellant to reclaim the input VAT on the purchase.

In 2001 the Appellant leased the property to Company B, an optician whose business supplies are VAT-exempt. Although the Appellant initially charged VAT on the rent, a 2007 inspection by Entity A (formerly HMRC) advised that, because the tenant was “connected” with the Appellant, Schedule 10 disapplied the option to tax for the lease, rendering the rent exempt.

In September 2014 the Appellant sold the property, still subject to the lease, to Company A (an unconnected purchaser) for £1,149,374. He did not charge VAT on the sale price, relying on advice that Schedule 10 again disapplied the option to tax. Entity A disagreed and issued an assessment treating the price as VAT-inclusive (£191,562 VAT).

The Appellant’s challenge was dismissed successively by the First-tier Tribunal, Upper Tribunal and, by majority, the Court of Session (Inner House). The present judgment is of the Supreme Court, constituted by Judge Rose and four concurring justices.

Legal Issues Presented

1. Whether, on the proper construction of paragraphs 12 and 13 of Schedule 10 VATA (read with regulations 112–115 of the VAT Regulations 1995), the Appellant was a “developer of the land” when selling the property to Company A.
2. If so, whether the “exempt land test” was met such that the option to tax was disapplied, rendering the sale exempt from VAT.
3. How the court should resolve the apparent circularity whereby VAT liability seems to depend on the seller’s own decision whether to charge VAT.

Arguments of the Parties

Appellant's Arguments

• Because he had already exercised the option to tax, he necessarily intended or expected that VAT would be chargeable on the sale price; this alone satisfied paragraph 13(4), making him a “developer of the land.”
• Once that intention is established, paragraph 12 automatically disapplies the option to tax, so the grant is exempt and no further inquiry into VAT should occur.
• The tribunals erred in treating absence of evidence of subjective intention as fatal; the test should instead be objective, based on the option having been exercised.

Respondents' (Entity A and Entity B) Arguments

• The “capital item” test in paragraph 13 requires an intention or expectation that the purchaser will incur VAT-bearing expenditure other than the very acquisition cost under consideration; otherwise the provision is circular.
• Because the Appellant knew no VAT would actually be charged on the sale, he could not have intended or expected Company A to incur qualifying VAT-bearing expenditure; therefore he was not a “developer of the land.”
• A broad reading of the Appellant’s kind would undermine the anti-avoidance purpose of Schedule 10 by enabling exempt businesses to reclaim input VAT and later sell land VAT-free.

Table of Precedents Cited

Court's Reasoning and Analysis

The Supreme Court accepted that Schedule 10 aims to prevent exempt businesses from recovering input VAT via strategic deployment of the option to tax. The Court identified a drafting “conundrum”: liability appears to hinge on whether the seller chooses to charge VAT. To avoid this circularity, the Court preferred the Respondents’ construction.

Key analytical steps:

1. Paragraph 13(4) imports the definition of a “capital item” from regulation 113. This should be read purposively in the context of anti-avoidance, not literally so as to defeat that purpose.
2. The “intention or expectation” must relate to VAT-bearing expenditure other than the acquisition cost currently under scrutiny; otherwise a seller could always exempt a transaction simply by having opted to tax.
3. No party intended or expected Company A to incur any further VAT-bearing capital expenditure (e.g. refurbishment) exceeding £250,000. Therefore the land would not become a “relevant capital item” in the purchaser’s hands.
4. Because that prerequisite for being a “developer of the land” failed, paragraph 12 did not switch off the option to tax; the sale remained taxable.
5. The Court found reliance on the Appellant’s subjective legal knowledge unnecessary; construction of the statute, not evidence of the seller’s belief, resolves the issue.

Holding and Implications

APPEAL DISMISSED.

Consequently, the VAT assessment of £191,562 stands against the Appellant. The decision clarifies that, under Schedule 10 VATA, a seller’s mere expectation of charging VAT on a sale price is insufficient to disapply the option to tax; there must be an intention or expectation of additional qualifying capital expenditure by the purchaser. The ruling tightens the application of the anti-avoidance provisions but does not create a wholly new doctrinal test; it primarily affirms a purposive reading of existing statutory language.