VAT: Was an option to tax valid? The Rolldeen Estates Ltd case

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In the First-Tier tribunal (FTT) case of Rolldeen Estates Ltd there were a number of issues, inter alia; whether the appellant’s option to tax (OTT) was valid, if not, whether HMRC had the power to deem it valid, whether HMRC acted unreasonably and whether appellant estopped from relying on earlier meeting with an HMRC officer.

Background

The letting of property is an exempt supply, however, a landlord the owner can OTT the property and charge VAT on that supply.  If the OTT is exercised, the supplier is able to reclaim input VAT on costs such as repairs and maintenance, but charges output VAT on its supplies.  The OTT provisions are set out at The VAT Act 1994, Schedule 10.

The appellant in this case had previously submitted an OTT form VAT1614A and charged VAT on the rent to its tenant. Subsequently, the property was sold without charging VAT. HMRC issued an assessment for output tax on the sale value.

Schedule 10

A taxpayer does not need HMRC’s permission to OTT, unless that person has already made exempt supplies in relation to that property – in particular, if the property has already been let without VAT having been charged.  In that scenario, the person must apply to HMRC for permission to exercise the OTT, and permission will only be given if HMRC are satisfied that the input tax is fairly attributed as between the exempt period and the taxable period. When OTT the company stated that no previous exempt supplies of the relevant property had been made and this was also confirmed in subsequent correspondence with HMRC.

Appellant’s contentions

The company informed HMRC that the OTT was invalid so that no VAT was due on the sale. Evidence was provided which demonstrated that Rolldeen had made exempt supplies before the date of the OTT so that HMRC’s permission had therefore been required before it could be opted. No permission had been given and therefore there was no valid OTT in place even though the appellant had purported to exercise that option. Also, the appellant submitted that it was unreasonable of HMRC to have exercised the discretion to deem the OTT to have effect, because they had failed to take into account the fact that during an inspection, HMRC had known that Rolldeen had made exempt supplies before OTT.

HMRC’s view

VATA, Schedule 10, para 30 allows HMRC retrospectively to dispense with the requirement for prior permission, and to treat a “purported option as if it had instead been validly exercised”.  HMRC issued a decision stating that it was exercising its discretion under Schedule 10, para 30 to treat the relevant property as opted with effect from the date of the VAT1614A and that VAT was due on the sale and the assessment was appropriate.

Decision

The FTT found that:

• after an inspection by HMRC it knew that prior exempt supplies had been made
• although HMRC knew exempt supplies had already been made Rolldeen was estopped* from relying on that fact, because both parties had shared a “common assumption” that the OTT had been valid
• para 30 could be used to retrospectively validate the OTT (albeit only in relation to supplies made after 1 June 2008).  In this case that was sufficient as the sale of the property occurred on in March 2015
• HMRC had not acted unreasonably because they had not taken into account their own failure to carry out a compliance check
• this is exactly the sort of situation for which para 30 was designed
• it was entirely reasonable and appropriate of HMRC to deem the purported option to have been validly exercised

The appeal was rejected and the assessment was valid.

Commentary

Again, proof, if proof is needed, that OTT can be a complex and costly area of the tax and care must always be taken. Advice should always be sought, as once an OTT is made, there is usually no going back.

An interesting point in this case was that no case law was cited on this issue and the FTT was unable to identify any.

* The principle of “estoppel” means that a person may be prevented from relying on a particular fact or argument in certain circumstances.