Moulsdale (t/a Moulsdale Properties) v Revenue and Customs (Scotland) [2023] UKSC 12

Mr Moulsdale sold property without charging VAT, believing Schedule 10 VATA disapplied his option to tax. HMRC assessed him for VAT. The Supreme Court held that when determining if a grantor is a 'developer of land', the intention regarding VAT-bearing capital expenditure must relate to expenditure other than the acquisition cost of the very transaction being assessed.

Facts

Mr Moulsdale purchased commercial property in 2001 and exercised an option to tax the land under Schedule 10 of the Value Added Tax Act 1994 (VATA). He leased the property to Optical Express, a connected party operating a VAT-exempt optician business. In 2014, Mr Moulsdale sold the property to Cumbernauld SPV Ltd, an unconnected purchaser, for £1,149,374 without charging VAT, believing the option to tax was disapplied under Schedule 10 paragraphs 12-17. HMRC disagreed and assessed Mr Moulsdale for output VAT of £191,562.

Issues

The central issue was the proper construction of paragraphs 12 and 13 of Schedule 10 VATA, particularly whether Mr Moulsdale was a ‘developer of the land’ such that the option to tax would be disapplied. This turned on whether he intended or expected the property to become a ‘relevant capital item’ in the hands of Cumbernauld SPV. A circularity problem arose: if VAT was expected to be charged, the option would be disapplied making VAT not chargeable; if VAT was not expected, the option would apply making VAT chargeable.

Judgment

Lady Rose, with whom the other Justices agreed, dismissed the appeal. The Court held that HMRC’s construction was correct: when determining whether a grantor intended or expected VAT-bearing capital expenditure, one must look to expenditure other than the acquisition cost of the very transaction being assessed. Lady Rose stated:

In my judgment, for the purposes of these provisions, the grantor’s intention or expectation as to the incurring of VAT bearing expenditure on a capital item must be an intention or expectation about incurring some other cost, different from the very expenditure to which the test in paras 12 and 13 is being applied in order to decide whether it should bear VAT or not.

The Court rejected Mr Moulsdale’s argument that an objective test should apply based simply on the exercise of the option to tax, noting:

The problem with that construction is that it allows the taxpayer who has taken advantage of exercising the option to tax its land so as to claim input tax credits or to spread payments of irrecoverable input tax then to switch off the option to tax and make a cheaper, VAT exempt sale to a non-taxable purchaser simply by intending or expecting to sell the land or building for more than £250,000.

Implications

This decision clarifies the anti-avoidance provisions in Schedule 10 VATA concerning the option to tax land. The ruling prevents taxpayers from exploiting circularity in the legislation to obtain both the benefits of opting to tax (recovering input VAT) and subsequently making exempt sales. The Court emphasised that anti-avoidance provisions eroding the entitlement to opt to tax should be construed narrowly. The judgment confirms that factual inquiries into a grantor’s knowledge of the statutory provisions are generally inappropriate, and that the focus should be on whether there was an intention or expectation of incurring VAT-bearing capital expenditure beyond the transaction itself.

Verdict: Appeal dismissed. HMRC’s assessment of VAT on the sale was upheld. The option to tax was not disapplied because Mr Moulsdale did not intend or expect Cumbernauld SPV to incur VAT-bearing capital expenditure other than the acquisition cost of the transaction itself.

Source: Moulsdale (t/a Moulsdale Properties) v Revenue and Customs (Scotland) [2023] UKSC 12