VAT Connect – October 2014
Property ‘Exclusive of VAT’ contract challenged
A recent decision by the Court of Appeal held that a property buyer was not obliged to pay VAT, even although the contract stated that all sums payable under the contract were “exclusive of VAT” and that any obligation to pay money included any VAT that may be due. A VAT liability was left to be met by the seller. Great care and good advice is required in the drafting process.
The case concerned the sale of a commercial property by CLP Holdings to Messrs Singh and Kaur for a price of £130,000. It was not heard as a VAT case but a dispute between the parties. CLP had opted to tax the property, so VAT was chargeable. Negotiations for the purchase began in 2002 and it completed in August 2006, however VAT was mistakenly not charged at completion and was not identified as an issue throughout the sale process by the vendor. It was stated in the general conditions of the contract that ‘all sums payable under the contract are exclusive of VAT’ and that ‘any obligation to pay money includes an obligation to pay any VAT chargeable’. In 2007 HMRC assessed VAT on the seller for the sale, who then asked the purchaser to pay the VAT, who refused to pay.
The Court of Appeal held that the correct interpretation was that the parties intended that nothing would be payable in addition to the agreed price of £130,000, relying on the ‘special conditions’. They noted that the ‘general conditions’ of the contract, which detailed that all sums were exclusive of VAT, were inconsistent with the special conditions, which did not mention VAT. In addition, the contract stated that if there was an inconsistency between the general conditions and the special conditions of the contract, then the special conditions of the contract would prevail.
The case highlights that any contracts should ensure that conditions for VAT are covered fully, both in general and special conditions – to avoid the risk of dispute over any VAT. Consideration should be given to indemnity or implications in the event that VAT becomes payable and appropriate VAT advice sought.
Online VAT return filing rules relaxed
VAT law has been changed from1 July 2014, to allow certain taxpayer groups to submit VAT returns to HMRC by telephone and paper, rather than being required to submit online. If you have difficulty accessing online facilities, this may help you.
The vast majority of businesses were legally required to file their VAT returns online from 1 April 2012. Those businesses who contacted HMRC to explain their difficulties in filing online were generally told by HMRC that they should find a computer to use elsewhere or ask an agent to do it for them. However, recent tribunals have held that UK VAT law failed to take account of individual ability to access online services, and was in breach of the European Convention on Human Rights.
Following a formal consultation exercise, the relevant VAT Regulations have been amended to allow;
- approved telephone filing for use by businesses that cannot file online, and
- an exemption to allow businesses who cannot file online to submit a paper return.
Registered businesses are required to satisfy HMRC that it is not reasonably practicable for it to file online, before it can be an approved user of telephone or paper returns. HMRC will consider needs based on;
- computer illiteracy (linked to age)
- remoteness of location
Full details of this can be found at http://www.hmrc.gov.uk/briefs/vat/brief2914.htm.
Self-storage is subject to VAT
The Upper Tribunal (‘UT’) allowed an HMRC appeal against the decision of a lower Tribunal, ruling that the supply of self-storage units are taxable at the standard rate. This is important for those providing any kind of storage to customers, not just ‘self-storage’.
The business – David Finnamore (t/a Hanbidge Storage Services) (case UKUT 0336) provided self-storage facilities, allowing customers to use metal storage containers located on open land that the company owned. The company had numerous units on the land that were arranged to allow vehicle access to each. The site as a whole was surrounded by a fence and was accessed through one set of security gates, which were locked at night. The firm advertised the service and facilities as a ‘self-storage facility’. The containers were let under a standard rental agreement which gave the customer a right to use a specific storage container and the land on which it was located. After a routine VAT inspection, HMRC ruled that what was being provided was a taxable supply of self-storage facilities.
The company considered their supply was one of a right over land and was therefore exempt from VAT, and appealed the HMRC decision. The lower Tribunal ruled in favour of the company, but in the UT, it was concluded that the elements of the supply were so closely linked that they formed a single indivisible economic supply. That did not qualify as a supply of land as the typical customer’s primary purpose was to be provided with a storage unit, and not to have a right over the land that the unit sat on. As a result the UT agreed with HMRC that the primary supply was one of storage units, and that the whole supply was subject to VAT at the standard rate.
Since the period covered by the case, the law has changed to bring more storage into the scope of VAT.
Firm escapes surcharges by blaming failure to pay VAT on the recession
The First Tier Tax Tribunal allowed an appeal by a business to have their default surcharges for late payment of VAT removed as a result of the direct impact of the recession. This may offer some assistance to taxpayers in similar circumstances, though the decision is widely seen as going beyond the ‘reasonable excuse’ arguments available in law.
The company, Scrimsign (Micro-Electronics) Limited (case UKFTT 866) had failed to pay quarterly VAT liabilities on time on three separate occasions and appealed that this was due to the fact that they had been “badly hit” by the financial crisis, and this should be accepted as a reasonable excuse for non-payment of VAT.
In a well-publicised case, the company clearly presented a strong case to the Tribunal, demonstrating that their turnover had dropped by 50% and they had been forced to cut their working week. The Tribunal accepted that the financial difficulties the business faced as a result of the recession were outwith normal business hazards, and as a result agreed that the surcharges should be removed.
The decision appears to contradict VAT Law, which clearly states that ‘insufficiency of funds’ cannot qualify as a reasonable excuse, regardless of the circumstances, though the taxpayer relied on the circumstances being exceptional and out of his control. It seems likely that HMRC may appeal this decision.