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Timing of notification
On 30 August 1996, Chalegrove Properties Ltd, a property investor and developer, agreed to sell Chalegrove House to another company for £2.475 million exclusive of VAT. In the agreement between the parties it was stated that the house be transferred as a going concern.
The day before the agreement, the purchasing company sent a letter to Customs giving notice of its election to waive exemption in relation to any exempt supplies relating to Chalegrove House to take effect from 29 August 1996. Although it was posted first class, Customs did not receive it until 3 September.
The point under appeal was whether for the purposes of the transfer of a going concern provisions in VAT (Special Provisions) Order 1995 SI 1995 No 1268, the purchasers had given written notification of the election no later than the relevant date, which was 30 August. Customs said that it was not enough to have posted the letter, as it was not given until received by them, namely on 3 September. Thus the tribunal had to decide if notification was given on the date of posting, the date it was reasonable to have expected it to have arrived at Customs, or the actual day when Customs opened their post.
Section 7, Interpretation Act 1978 authorises a document to be served by post, and 'unless any contrary intention appears, the service is deemed to be effected by properly addressing, pre-paying and posting a letter containing the document and, unless the contrary is proved, to have been effected at the time at which the letter would be delivered in the ordinary course of the post'. Customs said that when giving the notice through the post, the date was when the letter is proved to have been received by them. The tribunal agreed that the appellant could not rely on a letter posted first class reaching 'in the ordinary course of the post' Customs the next day, so the appeal would turn on whether a contrary intention appears to displace the overriding presumptive rule of law.
The tribunal looked at the wording in Article 5(2) of the order, and said that it required the transferee to have given 'written notification of the election required'. It was significant that where the VAT legislation wanted to show that the date of receipt was determinative, it did so explicitly. For instance, section 59 provided that a return is not furnished until it is received by Customs. This led the tribunal to conclude that a balanced and workable interpretation of Article 5(2) was to say that written notification of the election was given by the transferee when he put it in the post.
The tribunal was satisfied that a contrary intention appeared to displace the statutory consequences contained in section 7, Interpretation Act. Notification of the election should be regarded as given when the letter was posted.
The appeal succeeded.
(Chalegrove Properties (17151).)
Halifax strikes again
The appellants, James and Hannah Laurie, set up a Montessori nursery school in a disused barn owned by James Laurie and two others (known as the landlords). The landlords let the barn to the appellants under a 20 year lease for £500 rent a year. The appellants began work to convert the barn into a nursery school, and registered for VAT in April 1999. A VAT officer advised the appellants that most input tax relating to the conversion work would not be recoverable under the partial exemption regulations, and also told them that the provision of a nursery car was exempt under item 4 of Group 7 of Schedule 9 to the VAT Act 1994. Thus any input tax claimed would be restricted by the partial exemption de minimis limits.
After taking professional advice, a lease and leaseback arrangement was entered into. This consisted of the appellants creating a lease of the property back to the landlords for a nominal non-monetary consideration, then the landlords sublet the property back to the appellants for a nominal sum. The idea was that the lease would constitute a taxable supply to which the conversion costs could be attributed, the appellants having waived exemption under paragraph 2 of Schedule 10 to the VAT Act 1994.
Customs refused the appellants subsequent repayment claims of input tax on the barn conversion saying that the sublease did not constitute a supply in the course or furtherance of a business. A departmental review upheld this decision.
Before the tribunal, Customs said that the sublease was a mere device, and referred to the recent Halifax plc (17124) decision in support of their argument.
The appellants disagreed. It was necessary to look at the transaction in the wider perspective and put it into context. The sublease arrangement was done to create a taxable supply to enable substantial input tax recovery which would be important for the success of the appellants' business. The sublease may have been small, but it existed, and imposed obligations on both parties. It would be misleading to look at the transaction in isolation, and the phrase 'in the course or furtherance of a business' implied that each supply did not have to be a business in its own right.
The tribunal said that the appellants were honest in stating that the object of the subleasing arrangement was artificial and designed to obtain a tax advantage. The case was virtually indistinguishable from the Halifax case, however, so while the grant of the sublease and sub-underlease were real transactions, they were not transactions made in the course or furtherance of a business.
The appeal failed.
Already therefore the consequences of the Halifax case are being felt, and in this instance it is a small business that has been caught, without presumably the resources that the Halifax must have to overcome such setbacks. It is perhaps time that Customs made a pronouncement as to what businesses who have similar appeals in the pipeline should do, pending the outcome of any subsequent appeals in Halifax.
(James E Laurie and Hannah Laurie trading as The Peacock Montessori Nursery (17219).)
