During the Office of Tax Simplification’s recent review of VAT, I made the point that one area of extreme complexity (if you accept that incomprehensibility and complexity are aligned) arises from the so called anti-avoidance provisions in VATA 1994 Sch 10, governing when the option to tax a property fails to bite. I did not call for their simplification, but for their abolition.
The rules are intended to stop input tax recovery on property costs by making certain supplies exempt despite the option being made. In most cases, the tax that would be chargeable on rents and premiums would, in due course, match or exceed the input tax in point. So, the provisions are designed rather to accelerate tax collection than to increase it in real terms. The complexity created to achieve a cashflow effect is disproportionate.
And the D Moulsdale case ([2018] UKFTT 309) makes my point perfectly.
Before I describe the detail, it is worth looking at the judge’s comments on the legislation at the end of the process of analysing it. She says: ‘We observe that the general tenor of European VAT law is to make more supplies taxable and minimise exemptions. 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.’
That’s a strong word for a judge to use about the legislation she is required to construe. It contains a kernel of truth; namely, that the legislation is meaningless, and that her decision arises from an interpretation of which is the least dubious of two dubious outcomes. There is no ‘right answer’, only a less wrong answer.
What was the issue? Perhaps you should reach for a set of cold towels before embarking on it. In essence, however, it is as follows. The option to tax (‘option’) is not applicable on a supply where the occupant of the building is either the original supplier, its related party or a financier of the situation, where that occupant cannot claim more than 80% of its VAT. However, that is only the case in which the building is within the capital goods scheme. If the supply in question is taxable, and more than £250k, it comes into that scheme. But if the option does not bite, the supply is exempt, which means it is not in the scheme; but in that case, the rules do not apply, and it is within the scheme. But in that case, the option no longer bites because it is in the scheme, so it is exempt. But then it is not in the scheme, which means the supply is taxable. But then… (repeat ad nauseam).
The law is plainly an ass. And this is what the judge was effectively saying. She had to look for the purpose behind the provision to choose which of the two nonsensical outcomes was the least nonsensical. Even here she struggled, as this quote shows: ‘We find that the purpose of the legislation, insofar as it is discernible, is to restrict the scope of the right to opt for taxation in certain stipulated circumstances and that it is not limited to anti-avoidance.’ The mere purpose to restrict something, if indeed there is any purpose, cannot be regarded as a compelling driver towards a purposive outcome of the analysis. So she settles for the interpretation which leaves less room for people to contrive avoidance by reference to using Sch 10 against its general purpose, which is that a person who has opted ought to account for VAT.
There does not appear to be much more to the tribunal’s reasoning than this. That it is reduced to such a conclusion is an indictment of the legislation.
Which brings me again to my first point: namely, that these so called anti-avoidance provisions probably achieve nothing more than shifting tax collection to an earlier date, and the price paid for this dubious fiscal outcome is incomprehensible legislation. It is high time for it to be abolished.
During the Office of Tax Simplification’s recent review of VAT, I made the point that one area of extreme complexity (if you accept that incomprehensibility and complexity are aligned) arises from the so called anti-avoidance provisions in VATA 1994 Sch 10, governing when the option to tax a property fails to bite. I did not call for their simplification, but for their abolition.
The rules are intended to stop input tax recovery on property costs by making certain supplies exempt despite the option being made. In most cases, the tax that would be chargeable on rents and premiums would, in due course, match or exceed the input tax in point. So, the provisions are designed rather to accelerate tax collection than to increase it in real terms. The complexity created to achieve a cashflow effect is disproportionate.
And the D Moulsdale case ([2018] UKFTT 309) makes my point perfectly.
Before I describe the detail, it is worth looking at the judge’s comments on the legislation at the end of the process of analysing it. She says: ‘We observe that the general tenor of European VAT law is to make more supplies taxable and minimise exemptions. 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.’
That’s a strong word for a judge to use about the legislation she is required to construe. It contains a kernel of truth; namely, that the legislation is meaningless, and that her decision arises from an interpretation of which is the least dubious of two dubious outcomes. There is no ‘right answer’, only a less wrong answer.
What was the issue? Perhaps you should reach for a set of cold towels before embarking on it. In essence, however, it is as follows. The option to tax (‘option’) is not applicable on a supply where the occupant of the building is either the original supplier, its related party or a financier of the situation, where that occupant cannot claim more than 80% of its VAT. However, that is only the case in which the building is within the capital goods scheme. If the supply in question is taxable, and more than £250k, it comes into that scheme. But if the option does not bite, the supply is exempt, which means it is not in the scheme; but in that case, the rules do not apply, and it is within the scheme. But in that case, the option no longer bites because it is in the scheme, so it is exempt. But then it is not in the scheme, which means the supply is taxable. But then… (repeat ad nauseam).
The law is plainly an ass. And this is what the judge was effectively saying. She had to look for the purpose behind the provision to choose which of the two nonsensical outcomes was the least nonsensical. Even here she struggled, as this quote shows: ‘We find that the purpose of the legislation, insofar as it is discernible, is to restrict the scope of the right to opt for taxation in certain stipulated circumstances and that it is not limited to anti-avoidance.’ The mere purpose to restrict something, if indeed there is any purpose, cannot be regarded as a compelling driver towards a purposive outcome of the analysis. So she settles for the interpretation which leaves less room for people to contrive avoidance by reference to using Sch 10 against its general purpose, which is that a person who has opted ought to account for VAT.
There does not appear to be much more to the tribunal’s reasoning than this. That it is reduced to such a conclusion is an indictment of the legislation.
Which brings me again to my first point: namely, that these so called anti-avoidance provisions probably achieve nothing more than shifting tax collection to an earlier date, and the price paid for this dubious fiscal outcome is incomprehensible legislation. It is high time for it to be abolished.
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