Option to tax not disapplied, seller was not a developer

In Moulsdale t/a Moulsdale Properties v HMRC [2023] UKSC12, the Supreme Court held that the seller of an opted-to-tax property did not meet the provisions allowing him to disapply the option to tax. He was not a developer, the sale was not exempt and VAT should have been charged.

• Schedule 10 of VATA 1994 provides for the compulsory disapplication of an option to tax in certain circumstances.
• If the relevant provisions apply, a sale of property where an option to tax has been exercised goes back to being a sale that is VAT-exempt.

Mr Moulsdale sold an office building to an unconnected purchaser who was not VAT registered. He did not charge VAT.

• When he had bought the building the seller, who had exercised an Option to tax over the building, charged VAT.
• Mr Moulsdale then exercised an option to tax and reclaimed the VAT on the purchase.
• He leased the property to Optical Express, a VAT-exempt business, and initially charged VAT on the rent due to the property being opted to tax. Following a VAT inspection HMRC advised him that Schedule 10 applied as he was connected to Optical Express, meaning that he should not be charging VAT on the rent as the option to tax was disapplied.
• When Mr Moulsdale sold the property to the unconnected purchaser, the sale was subject to the lease to Optical Express. As a result, he thought that schedule 10 would continue to apply, the sale would be exempt on the basis that the option to tax would be disapplied and so he did not charge VAT on the sale.
• HMRC assessed him for £191,562 of VAT in respect of his disposal of the building on the basis that the sale did not fall within any of the provisions of Schedule 10 meaning the option to tax could not be disapplied.
• Mr Moulsdale Appealed on the grounds that he fell within a different part of schedule 10 as a developer of the land who intended/expected the purchaser to pay VAT on the sale price for the building and the price exceeded £250,000. If this was the case then the option to tax could be disapplied and the sale would be VAT exempt
• His appeal was dismissed by the First Tier Tribunal, and subsequent appeals were also dismissed by the Upper Tribunal and the Scottish Court of Session.

The Supreme Court (SC) also dismissed his appeal deciding that Mr Moulsdale was not a developer of the land;

• For the purposes of Schedule 10, to decide whether the sale should bear VAT or not, the relevant intention or expectation as to whether the purchaser would pay VAT on a capital expense in relation to the building must be an intention/expectation about incurring VAT on some other cost, different from the actual price of the building itself, whereas here the intention/expectation related only to the actual price of the building.
• Schedule 10 is aimed at ensuring that exempt businesses cannot recover input tax. This purpose would be defeated if Mr Moulsdale was able to disapply the option tax on the sale as this would enable him to have the benefit of the option to tax the land as long as that was favourable to him but then to switch off the option to tax simply by selling it if he did not want to have to charge the purchaser VAT on the purchase price.

The SC noted the circularity of the rules here. In effect they could be interpreted as meaning that if Mr Moulsdale charged VAT he was a developer and if he did not, he was not, which was clearly unsatisfactory. The Court got around this by adopting HMRC’s purposive approach which they felt made as much sense as possible of the legislation. What is the aim of schedule 10 and would this be defeated by allowing Mr Moulsdale to claim the transaction was exempt? The judges concluded that it would.

Useful guides on this topic

Opting to tax land and property
What is an option to tax? What do I need to do to opt to tax? What happens if I buy an opted property?

Land & Property VAT (Subscriber guide)
An outline of the VAT treatment of some of the more common supplies of land and property.

Land & Property: Non-residential
This guide considers the VAT treatment of the supply of non-residential property.

External link

Moulsdale t/a Moulsdale Properties v HMRC [2023] UKSC12