20976
Exemption – purchase of a commercial property- option to tax – did the Appellant make a genuine decision to opt – no – appeal dismissed

MANCHESTER TRIBUNAL CENTRE

 
 	
					COBOL LTD	Appellant

- and -

THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: 	Lady Mitting (Chairman)
					
Sitting in public in Birmingham on 16 February 2009

John King, Chartered Accountant, for the Appellant

James Puzey, Counsel, instructed by the General Counsel and Solicitor to Her Majesty’s Revenue and Customs for the Respondents 

© CROWN COPYRIGHT 2009
DECISION

1.	The Appellant appeals against a decision of the Commissioners to raise an assessment to recover input tax of £80,675 claimed by the Appellant in its return for 03/04, the tax having been paid by the Appellant on its purchase of a commercial property which it subsequently leased out.  
2.	On behalf of the Appellant, oral evidence was given by its sole director and shareholder Mr. Stewart Walker and for the Respondents by Officers Sarah Dean and Deborah Hardwick.
The Law
3.	Schedule 9, Group 1 VAT Act 1994 exempts from tax the grant of any interest in or right over land or any license to occupy land.  Schedule 10 allows an election to be made, the effect of which would be to waive the exemption and the grant would revert to a standard rated supply on which output tax has to be charged and accounted for.
4.	It was common ground that the mechanism for opting to tax is a two stage process.  First the decision to opt is made.  Secondly the Commissioners have to be notified of the decision, normally within 30 days although they do have a discretion to accept a belated notification which they will normally do provided they are satisfied that a genuine decision to opt had been made.  To test the validity of the decision the Commissioners look at all the available evidence but they would, for example, need to see that output tax had been properly charged and accounted for from the date of the supposed election.
The issue before the tribunal
5.	The Appellant’s case to the tribunal was that it had made a genuine option to tax but had omitted to notify the Commissioners who were wrong in refusing to accept belated notification.  The Commissioners did not accept a genuine decision to opt had been made.  The single issue before the tribunal was whether or not the Appellant had made a genuine decision to opt to tax.  On behalf of the Commissioners, Mr. Puzey advised the tribunal that if we were to find that a valid decision had been made, the Commissioners would accept late notification.
6.	Mr. Walker set up Cobol in 1990.  The company trades from its own freehold premises in Loughborough and supplies a commercial decorating service.  Mr. Walker in the middle of the 1990s formed a partnership with his son which trades as The Loughborough Decorating Centre (“LDC”).  LDC does no contracting and is a wholly retail supplier of paints and decorating materials.  Both Cobol and LDC were registered for VAT at all material times.  Cobol had been registered with effect from 1 June 1991 and LDC with effect from 1 April 1995.
7.	LDC was a successful business and outgrew the small industrial unit from which it was trading.  Mr. Walker therefore started looking round for new premises for LDC and Octagon House in Duke Street, Loughborough became available.  LDC could not afford to make the purchase as it had no assets of its own and none to offer as security, and the Bank suggested that Cobol should purchase the property and let it out to LDC.  After a written bidding process, Cobol was successful in securing Octagon House for £461,000 which was the limit of the funding which the company could afford with Bank assistance.  It was from the outset Mr. Walker’s intention that Octagon House should be let out to LDC.  Cobol had no need or desire to use the premises and evidence of the intention was put before the tribunal in the form of a letter dated 8 March 2004 from the Borough of Charnwood Planning Authority and a letter of 24 April 2007 from the Yorkshire Bank.  The Bank confirmed that Cobol had always treated the purchase as an investment project with the immediate intention of renting out the unit for retail purposes.  The Planning Department gave permission for the premises to be used for retail purposes without planning permission.
8.	Some five to seven days before completion, Mr. Walker was “hit by the bombshell” that the vendor was to charge VAT on top of the agreed sale price.  Mr. Walker went back to his bank who confirmed that although Cobol had reached the limit of its funding they would bridge the amount of the VAT provided he could recover it back.  Mr. Walker therefore, on 23 February 2004, contacted the Commissioners’ National Advice Service.  Mr. Walker spoke to an agent named Claire Dickinson who recorded on her note that the caller was purchasing new commercial premises, the vendor was charging VAT, and the caller wished to know whether VAT could be reclaimed.  Ms. Dickinson asked the caller whether the vendor had opted to tax the property but as the caller did not know what that meant she transferred him to “Andy”.  Unfortunately there is no record of the conversation with Andy who has now left the department.  Mr. Walker’s recollection of the call was that it was brief; he had told Andy of the plan to make the purchase but that they had had a late notification of the addition of VAT and he wished to be sure, before proceeding with the purchase, that the VAT could be reclaimed.  Mr. Walker was pressed in cross-examination as to precisely what he told Andy.  He believed that he would have made it clear that there were two business and it was never Cobol’s intention to occupy the premises but to let it out to an associated business.  Equally Mr. Walker could not remember precisely what Andy’s advice to him had been but he came away from the conversation with no sense of foreboding and understanding that it was possible for Cobol to recover the input tax.  He said that Andy had said nothing to frighten him or that had lead him to believe that the purchase would be jeopardised by an inability to recover the tax.  He also did not remember Andy making any mention of having to notify the Commissioners of the decision.  Mr. Walker said that his prime concern was recovering the VAT and  he would have remembered if Andy had said anything that had a negative impact upon that.  Happy in the knowledge that the VAT was going to be recoverable, Cobol proceeded with the purchase which was completed on 27 February 2004 and LDC went into occupation.  The record keeping at Cobol was carried out by Mr. Walker’s wife. Mr. Walker did not mention to his wife the phonecall he had had with Andy and Mr. Walker himself had no part in the raising of the rental invoices to LDC.  This was Mrs. Walker’s role.  Although the tribunal did not hear evidence from Mrs. Walker, it is clear that she herself was unclear as to how the rent should be treated and she rang Cobol’s then accountant, Mr. Smith who advised her that it should be exempt.  Following this advice no VAT was ever charged on the rent.
9.	Cobol included the VAT on the purchase in its return for period 03/04 with a resultant net repayment claim of £69,671.23.  The return was selected by the Commissioners for query prior to the repayment.  Verification was handled by Ms. Deborah Hardwick who telephoned Mr. Walker on 12 May 2004.  Ms. Hardwick did not make detailed notes of what was said but her understanding, and this she did note, was that the company had purchased a commercial property “for purpose of wholly taxable business activity”.  She asked Mr. Walker to send her a copy of the invoice, which he did, and being satisfied that the property was not to be used for anything other than Cobol’s own business, Ms. Hardwick authorised the repayment.
10.	On 18 August 2005, Ms. Sarah Dean carried out a routine control visit to Cobol where she met with Mrs. Walker.  Ms. Dean identified the purchase of Octagon House, that the input tax had been reclaimed but that the property was being let out and no VAT being charged on the rent.  She also ascertained that input tax had been reclaimed in the sum of approximately £4,500 on various works of refurbishment and extension to Octagon House.  It was clear to Ms. Dean that the property was not being used by Cobol for its own taxable supplies and further that it was being let out and tax was not being charged on the rent.  Ms. Dean therefore advised Mrs. Walker that she believed that the input tax on the purchase had not been reclaimable and that an assessment would have to be raised to recover it.  Ms. Dean paid a further visit to the premises on 1 September 2005 – where she saw Mr. Walker and his accountant Mr. Smith – where once again she explained the basic option to tax rules and the restrictions in place on input tax recovery on purchases that relate to exempt supplies.  Mr. Walker and Mr. Smith appeared to accept Ms. Dean’s view but felt that they had been mislead in their earlier dealings with the Commissioners.
11.	Cobol then changed accountant to Mr. King, who entered into correspondence with the Commissioners and indeed made an application for belated notification of the option to tax, this being rejected by the Commissioners on the basis that they did not believe that a valid and genuine decision to opt had been made.
12.	Throughout his evidence in chief and cross-examination, Mr. Walker was quite certain that he had not been told by Andy that output tax had to be charged on the rent or that the Commissioners had to be notified of the decision.  He in fact stated that he had no knowledge of the concept of opting to tax or any process of that description at the time the purchase was made.  When asked by the tribunal when he first became aware of the process, he maintained that it was not until Ms. Dean’s control visit.  Until then all he had known was his understanding from Andy that he could reclaim the VAT.  This ignorance was borne out by Ms. Dean in her evidence when she was asked whether she thought Mr. And Mrs. Walker understood the process of opting to tax and her answer was that it was her impression that it was “new ground” to them.  In all other respects Ms. Dean found the books and record keeping to be in order and she detected no other problems on her visit.
13.	On behalf of the Appellant, Mr. King submitted that Cobol already owned its own property and had never intended to operate from Octagon House.  The property had been purchased in order that it could be let out to LDC and it was inconceivable that Mr. Walker would not have told this to both Andy and Ms. Hardwick.  He pointed out that there was no reason for the truth to be concealed.  Mr. King contended that the decision to opt to tax was in fact more a state of mind.  Mr. Walker did not attach a name to the process but he made the decision to purchase the property and to reclaim the input tax but because he didn’t understand the ramifications of his decision he failed to charge VAT on the rental.  It was not a positive decision to exempt the rent but a failure to tax it.
14.	I should make it clear at the outset that I found Mr. Walker to be a straightforward and truthful witness.  When he couldn’t remember something he openly said that he couldn’t and it is most unfortunate for him that for circumstances quite beyond his control it was some five years on that he was being asked to recall the contents of telephone calls.
15.	When Cobol purchased Octagon House there were two situations in which the input tax could have been reclaimed: first if the company was to have occupied it itself and used it for the purpose of its own taxable supplies or secondly if it was to let the property out but make an option to tax, charge VAT on the rent and notify the Commissioners of the decision.  It was therefore vitally important, before Andy could give Mr. Walker any constructive advice, that he fully understood what the position with regard to the property was.  Unfortunately due to the absence of any record and the unavailability of Andy, the contents of that telephone conversation will never be known.  It is possible that Mr. Walker, not understanding the significance of the various factors, did not explain the position fully enough.  Equally it is possible that he did explain but Andy misunderstood.  Yet again Mr. Walker may have misunderstood or forgotten what Andy told him.  Another possibility, which is not a matter for this tribunal, is that Andy may have misadvised Mr. Walker.  What is clear however is that at the conclusion of that telephone conversation, Mr. Walker believed he could reclaim Cobol’s input tax but was unaware that that came as part of a package called an option to tax or election to waive exemption.  Mr. Walker just did not know what the process was.  He had taken away from the conversation purely and simply that he could reclaim the input tax, which is exactly what he did and he did nothing further.  Mr. Walker’s ignorance of what else to do is borne out by the fact that his wife had to telephone Mr. Smith, the accountant, to ask about the tax liability of the rent.  Again I do not know what Mr. Smith was told but in the circumstances his advice was unfortunately incorrect.  I have no difficulty in accepting that both Mr. and Mrs. Walker  were ignorant of the process of opting to tax or electing to waive the exemption, call it what you will.  Given that ignorance, Mr. Walker could not have made a decision to opt to tax.  He could not make a decision to do something which he did not know he had to do.  The only decision which he made was to recover the input tax.  His thought process went no further than that and he did not therefore make a decision to opt to tax.  That decision was not made and consequently the appeal must fail.
16.	I have the utmost sympathy for Mr. Walker and for the company and the very unfortunate position in which it now finds itself.  I understand that all may not be lost and that there might be a mechanism through the Capital Goods Scheme under which some of the input tax could yet be recovered.  If this is so then I very much hope that the parties could work towards a resolution.
17.	In summary the appeal is dismissed.  The Commissioners made no application for costs and I make no order.
MAN/06/689

LADY MITTING
CHAIRMAN
Release Date: 13 March 2009