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You can't opt out of paying VAT

Posted on 17 May 2023

In the recent Moulsdale case, a VAT dispute heard at the Supreme Court is instructive in showing how the judiciary approaches legislation that is unclear.

The issue here was whether an anti-avoidance provision "switching off" the taxpayer's option to tax still operated. Broadly, if an eligible taxpayer "opts to tax" a commercial property, they are able to charge VAT (and hence recover input tax) on supplies related to such property, where they would otherwise be VAT exempt.

In this case, Moulsdale Properties had opted to tax a commercial property, but sold it without charging VAT on the sale price. Schedule 10 of the VAT Act 1994 applies such that if Mr Moulsdale intended or expected the purchaser to pay VAT on the sale price, he (Mr Moulsdale) would be treated as a developer and the option to tax would be disapplied, so no VAT would be payable. The problem for HMRC (and in due course the judges) was that the legislation was circular. In effect, if the land in the purchaser's hands was a "capital item", its purchase price included VAT. However, the effect of Schedule 10 meant the supply was an exempt supply, so the purchaser would not have paid VAT, in which case it would not be a" capital item", at which point the option to tax revived so that VAT was again due - and so on.

The Supreme Court ultimately decided Mr Moulsdale did have to account for VAT out of the sale proceeds, which is perhaps unsurprising. They came to that decision by looking at why the anti-avoidance legislation exists, namely to restrict input VAT recovery (on expenses like the land itself and on surveyor's and solicitor's fees) when the land is ultimately put to exempt use. What concerned the Supreme Court was that if the taxpayer, having opted to tax but been blocked by the anti-avoidance election from recovering input VAT, could then make an exempt sale of the land, by retaining 100% of the sale proceeds, the taxpayer would effectively recover some of the blocked input VAT.

There were two respectable but diametrically opposed ways of interpreting the legislation. By focussing on its purpose and the economic effect, the Supreme Court was able to decide as a matter of law which interpretation should prevail.

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