To The Letter - Customs have made nit-picking a fine art, argues JOHN PRICE FCA.

Are aggressive VAT planning schemes resulting in a nit-picking attitude by Customs?', I mused. 'First, they take the point in Higher Education Statistics Agency Ltd v Commissioners of Customs and Excise [2000] STC 332 that if you buy property at auction and pay a deposit on the spot, which will be held by the vendor's solicitor as agent, not stakeholder, that creates a tax point. If you have not previously notified an option to tax, you are too late for a transaction in rented property to count as the transfer of a going concern.'

'They were right in law though on that', said the Busy Practitioner.

'True, but did they really need to take the point without warning everyone? Now, in Chalegrove Properties Ltd (17151), they argued in a similar situation that the notification was late because it was not "given" to them no later than the "relevant date", as required by Article 5(2) of the Special Provisions Order (SI 1995 No 1268). The letter was posted first class on Thursday 29 August 1996, but they claimed not to have received it until Tuesday 3 September, whereas the deposit had been paid on 30 August. This was a negotiated sale, not an auction, but Article 5(3) made the "relevant date" of the transfer the earliest tax point; i.e. that created by the ten per cent deposit rather than when the remaining 90 per cent was paid on completion.'

'You mean Customs are saying that the notification must be received by the relevant date, regardless of any postal delays, even where they accept that it was posted beforehand. That is nit-picking taken to a fine art. But, surely if Chalegrove sent it first class the day before, they had posted it at a time at which it was reasonable to expect it to arrive in time?'

'Yes, but Customs were in nit-picking mode, not reasonable mode. Section 98, Value Added Tax Act 1994 says that "any... notification... to be served on, given to... any person for the purposes of this Act may be served, given... by sending it by post in a letter addressed to that person..."'

'Well there you are then.'

'Unfortunately not, section 7, Interpretation Act 1978 indeed says that service is deemed to have been effected by posting at a time at which the letter would be delivered ordinarily "unless the contrary is proved". The only exception is "unless the contrary intention appears" in the relevant legislation. Customs said they had proved delivery on 3 September which the tribunal accepted.'

'So was it a win for the nit-pickers then?'

'Not if there was a contrary intention in the legislation. The tribunal found it unreal to suggest that, not only must potential purchasers at auction have posted letters of notification but, before the date of the auction, they would have to have confirmed receipt by Customs in order to be safe. Moreover, if an inquisitive officer asked what their status was, they would all have had to admit that there had not yet been a "grant" and that they were therefore not yet "transferees".'

'Was that a problem?'

'The tribunal did not suggest it was, and it has long been recognised that there is nothing in the law to say that you have to have an interest in a property at the time at which you opt to tax it. However, the tribunal then commented that, if Customs were right, it also meant that transactions requiring a deposit were disadvantaged compared with those that did not. The pragmatic answer was therefore to take notification as made in time if posted on the day on which the deposit was paid. That also would eliminate the vagaries of the post.'

'Hooray for common-sense! What a nonsense that commercial transactions could be hampered by the difficulty of establishing that notification had been made.'

'Not so fast! Those were just practical points. VAT law has several rules which are asinine, having been proposed by Customs officials and drafted by Parliamentary draftsmen knowing little of business. The tribunal still had to find a legal grounding for its common-sense.'

'Did it succeed?'

'The tribunal firstly distinguished a 1974 judgment of the Court of Appeal in which "notice in writing to the intending vendor" was held to require that the vendors were aware of it. In contrast, opting to tax a property did not significantly affect Customs' function of managing the tax. There was no particular reason for them to be aware of it.'

'But you must notify Customs – obviously they have to know whether VAT ought to have been charged on a property transaction.'

'Yes. The decision is not well expressed on this point but I think the tribunal meant that there was no need for instant knowledge. It said that receipt by Customs of the notification was not a necessary requirement in the scheme of the transfer of a going concern code, by which I assume it meant prior notification as opposed to receiving it promptly. The tribunal also found it significant that where the draftsman wanted the date of receipt to decide a point, he said so, as in section 59 re the default surcharge, which provides that a return is not furnished until received.

'Thus, a more balanced and workable interpretation was that written notification of the election was given when put in the post. In the circumstances of Article 5(2), the tribunal was satisfied that a contrary intention appears.'

'Sounds like creative interpretation to me.'

'Yes. Let's hope Customs have the common-sense to accept it.'

A St J Price FCA is a VAT consultant in Gloucestershire. He may be contacted on 01285 851888; fax: 01285 851889; e-mail: asjprice@aol.com.

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