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VAT on property transfers and hierarchy clauses: CLP Holding Company

Over the summer, the Court of Appeal handed down judgment in the case of CLP Holding Company Ltd v Singh (1) & Kaur (2) [2014] EWCA Civ 1103. The case throws up some useful warnings and reminders about VAT on property transfers, the proper construction of contracts and hierarchy clauses.

Background

A transfer of property (both freehold sales and the granting of leases and tenancies) constitutes a supply of goods within the meaning of the Value Added Tax Act 1994. However it is also an exempt supply under Schedule 9, Group 1 of the 1994 Act (with various marginal exceptions). No VAT is therefore chargeable on the supply and the vendor is unable to reclaim VAT incurred on expenses.

A vendor or landlord can ‘opt to tax’ the property. This involves waiving the exemption under Schedule 10 of the 1994 Act. Schedule 10 prevents a vendor or landlord opting to tax land or parts of land being used for residential or charitable purposes. Largely this leaves freehold sales and leases of commercial property. Having exercised the option to tax, the owner is liable to account to HMRC for VAT and so in turn should charge VAT to any purchasers, whether by transfer, assignment or grant.

Opting to tax land is generally an unattractive option because it lowers the commercial appeal of the asset but in certain situations opting to tax can be advisable. Commonly, this can happen where a vendor has previously incurred significant VAT inclusive sums on the purchase or refurbishment of the property and wishes to recover the input tax.

CPL v Sing & Kaur

The facts of CPL v Singh & Kaur are a cautionary tale to sellers of property and their conveyancers of how an option to tax can go wrong. The claimants sold a freehold property in the West Midlands to the defendants. The vendor had previously opted to tax the property in 1989.

The price was agreed at £130,000 in 2002 and on completion in August 2006, the purchasers paid that sum to the vendor. In late 2007, HMRC raised a notice of assessment relating to VAT on the transfer, which, at 17.5%, amounted to £22,750. The vendor then issued a claim for the VAT against the purchasers, who denied liability. The Deputy District Judge hearing the vendor’s summary judgment application took the view that the defence had no real prospect of success but, on appeal, HHJ Oliver-Jones QC considered that the claim had no merit and directed that there be judgment for the purchasers. The vendor appealed.

The contract comprised special conditions and incorporated the Standard Conditions of Sale (4th Ed.) (“the general clauses”). There was a ‘hierarchy’ clause providing that where there was a conflict or inconsistency between the two the special terms would prevail.

The Court of Appeal has recently stated that when construing hierarchy clauses “the contract documents should as far as possible be read as complementing each other and therefore as expressing the parties' intentions in a consistent and coherent manner. ... and that only in the case of a clear and irreconcilable discrepancy would it be necessary to resort to the contractual order of precedence to resolve it” (RWE Npower Renwables Ltd v J N Bentley Ltd [2014] EWCA Civ 150).

The key terms of the contract in CPL v Signh & Kaur were:

Special clause 1: “The Seller will sell and the Buyer will buy the Property for the Purchase Price,” the Purchase Price being defined as £130,000.

General clause 1.4.1: “An obligation to pay money includes an obligation to pay any value added tax chargeable in respect of that payment” and general clause 1.4.2: All sums made payable by the contract are exclusive of value added tax.”
The meaning of general clauses 1.4.1 and 1.4.2 was held to be clear, as borne out by authority. This supported the vendor’s position that the purchasers were liable for the VAT chargeable on the purchase price.

The vendor also argued that there was no conflict between the special and general clauses and special clause 1 should be construed in line with the general clauses. The purchasers responded that there was a conflict and so special clause 1 took precedence.

Kitchin LJ (delivering the only reasoned decision) stated that the general approach to construing a contract involved “ascertaining what a reasonable person [who has all the background knowledge which would reasonably be available to the parties in the situation] would have understood the parties to have meant.”

This investigation involves two (possibly conflicting) aspects. First, the court should have regard to the circumstances of the parties’ relationship and the relevant facts surrounding the transaction. Secondly, a contract must be construed as a whole and every effort must be made to give effect to all of its clauses – as LJ Kitchin put it: “the court should... preserve the general conditions as far as possible.”

However, LJ Kitchin, found that the reasonable person (as described above) would have concluded that the parties did not intend the buyers to pay anything over and above the £130,000 purchase price. The general conditions were not reconcilable with the special and so the special conditions prevailed.

At first glance, this might be a surprising decision, given the clear meaning of the general clauses but on a closer reading the analysis is correct. The special clauses should be construed to discover their true meaning rather than simply twisted by the court to avoid conflict with the general clauses at all cost. LJ Kitchin took note of a number of factors in reaching this opinion, including:

  1. the vendor claimants’ failure ever to communicate the alleged tax obligation to the purchaser defendants;
  2. the defendants were individuals and there was nothing to suggest they were aware of the risk of a VAT charge;
  3. the purchase monies had exchanged hands twice between the parties (pre-completion in the earlier stages of the negotiations) without VAT being raised;
  4. the requisitions and responses gave no hint that VAT was or might be payable.

Lessons to be learnt

Aside from the useful insight into the proper approach to the construction of a contract, the case demonstrates the risk of including a hierarchy clause in a contract incorporating standard conditions.

The message when acting for a vendor is clear:

  • First, the possibility of opting to tax and charging VAT should be considered and investigated at an early stage.
  • Second, if the purchaser is to be liable for VAT, make sure that the contract says so.