“The option to tax provisions reflect Article 137 of Directive 2006/112/EC (the “Principal VAT Directive”), which permits Member States to allow a right of option for taxation in respect of certain supplies, including supplies of land and buildings. Article 137(2) provides that Member States may restrict the scope of this right. The UK has chosen not only to allow an option to tax but also to restrict it pursuant to Article 137(2). The domestic law provisions which give effect to this restriction are those in paragraphs 12 to 17 of Schedule 10, entitled “Anti-avoidance”
“A supply is not, as a result of an option to tax, a taxable supply if- (a) the grant giving rise to the supply was made by a person ("the grantor") who was a developer of the land, and (b) the exempt land test is met.”
“In summary, the circularity can arise where a taxpayer wishes to sell an opted building, or land, but at the point of sale the building or land is not a capital item in the Capital Goods Scheme (“CGS”) for the seller. However, if the sale price exceeds£250,000 and is subject to VAT because of the option to tax, it has the potential to become a capital item in the hands of the purchaser and that is relevant in terms of the legislation. In circumstances such as where the “exempt land test”… is met the seller's option to tax is potentially disapplied rendering the supply exempt. However, that can result in circularity since, if the supply is no longer taxable, for the reasons set out below, a capital item in the CGS would not be created and therefore the supply then becomes taxable.”
“The unfortunate drafting of these legislative provisions can achieve the opposite result rendering a normal commercial transaction, where there is an option to tax, exempt. The circularity is to be deplored.”
“The appellant correctly, and conscious of its obligations in terms of VATA, considered the relevant taxing provisions. The starting point is that having opted to tax, the supply should bear tax. However, it can only do so if the option to tax is not disapplied. That is the relevance of the provisions of Schedule 10. Looking back at paragraph 12(1)(b), the supply will not be taxable if the “exempt land test” is met. The appellant then quite properly looked at paragraph 15. The property was occupied by a relevant person, which was OEWL which was connected with the appellant, but not the purchaser. As can be seen from paragraph 3 of the Statement of Agreed Facts, OEWL’s occupation of the building fell, and falls, squarely within paragraph 15(2) and therefore the land is exempt land. … As a matter of fact, we find that at the date of the grant the appellant knew that the supply would not be, and could not be, taxable. Accordingly, given the terms of Regulation 113(1) of the VAT Regulations,…and knowing that no other relevant expenditure was likely, the appellant could not have intended or expected that the property would become a capital item in the hands of the purchaser.”
“The question is exactly what that intention or expectation must be. In my view it must be an intention or expectation to incur expenditure on something which, if it is incurred, will result in there being a capital item within paragraph 113 of the VAT Regulations. Mr Lall submits that this imports a requirement for some knowledge of the Capital Goods Scheme. Whilst I can see that that is a conceivable literal interpretation of the words, I do not think that it is the correct interpretation on any form of purposive 11 construction, or indeed that it is necessary to strain the language of the words to conclude that the interpretation Mr Lall suggests is wrong. A perfectly legitimate literal interpretation is that the words “falling … to be treated as a capital item” simply describe a set of facts that would fall within the relevant regulations. The reference to “would become” relates to the nature of the intention or expectation: did the grantor in fact intend or expect that works would be undertaken of a type which would in fact fall within the regulations. There is no indication from the text of the legislation that Parliament only intended the rules to apply if the land did become a capital item. The draftsman could readily have addressed the point, for example by inserting “and became” after the reference to “intended or expected to be” in paragraph 13(2). It might also be expected that it would be specified that the land needed to become a capital item within a stated period. No such provision was included...”
“I have set out the legislative history in deference to the careful arguments that were addressed to the Court by counsel for the Commissioners. But I am not persuaded that an understanding of that history is of any real assistance in the determination of the issues which are now before the Court. It is plain that the Sixth Directive permits an election to waive the exemption which would otherwise be afforded to the letting and leasing of immoveable property. It is equally plain that the Sixth Directive permits a Member State to restrict the circumstances in which that election can be exercised. Paragraph 2(1) of schedule 10 VATA 1994 confers the right to elect: paragraph 2(3AA) seeks to restrict that right. It is clear that the object of the restriction is to preserve the basic principle that an exempt business should bear input tax on supplies made to it by being denied the opportunity to treat that tax as allowable tax giving rise to a VAT credit. The restriction in paragraph 2(3AA) seeks to achieve that object by denying to an exempt business the option to treat the letting of a building which it will continue to occupy (for the purpose of that business) as a taxable supply. But that appears from a reading of paragraph 2(3AA) in the context of the other provisions in paragraphs 2 and 3A of schedule 10. The legislative history illustrates the difficulties encountered by the United Kingdom government in promoting legislation which achieves that object without giving rise to unintended consequences. But it does not, I think, throw light on the question which the Court has to determine on the present appeal. The task of the Court is to interpret the legislation which has been enacted; having in mind the object for which it has been enacted, but recognising that the extent to which that object has been achieved in the particular case must depend on the legislation itself. The Court cannot go outside the legislation. It must accept that, if the legislation fails to achieve that object in the particular case, that must be assumed to reflect Parliament's intention that it was not necessary or appropriate to do so.”
“…the only possibility of qualification would be if it were to be a capital item in the hands of the purchaser.”
“Mr Simpson advanced the argument that the intention should be considered prior to the supply on the basis that it is the grant that triggers the exempt land test. With respect that does not advance matters since the wording of paragraph 12(1) sits well with that since it refers to the “grant giving rise to the supply”
“The capital items to which this Part applies are any of the items … on or in relation to which the owner incurs VAT bearing capital expenditure …”
“We have some difficulty with [the Appellant’s] proposition that the process comes to a halt once it is established that the transaction is exempt in that that would mean that in cases where the sale price of the land and buildings was over£250,000 and the relevant person occupying it met the “exempt land test” there would be no charge to tax. Although the purpose of the legislation is to limit the circumstances in which the option to tax can be deployed it is also aimed at anti-avoidance and to implement that approach would be to encourage the avoidance of tax.”