A recent case* has highlighted the risks of not expressly dealing with VAT in a commercial property transaction.
The seller had opted to tax a commercial property but upon completion of the sale VAT had not been accounted for and had not been discussed by the parties before completion. A year after the sale, HMRC indicated to the seller that VAT should have been paid and tried to reclaim the VAT from the seller. The seller, in turn, tried to reclaim the VAT from the buyer.
The Court decided that the seller was liable for the VAT. As a result, the seller had to pay VAT of around £23,000 on the sale of the £130,000 property. If VAT is not properly taken into account in the sale contract, the seller could find itself liable for 20% of the purchase price to HMRC on a property sale. That’s £200,000 out of a property sale of £1.2 million – not a prospect that anyone would want to face!
So what did the contract say about VAT?
The Standard Conditions of Sale (which were incorporated into the sale even though the sale was of commercial property) generally protect the seller and allow them to reclaim the VAT from the Buyer because they state that:
- “all sums made payable under the contract are exclusive of VAT”; and
- “any obligation to pay money includes an obligation to pay any VAT chargeable”.
In this case the purchase price was not defined as being either ‘exclusive’ or ‘inclusive’ of VAT. In the absence of an express provision regarding the treatment of VAT, it could be presumed that the standard condition would deem the price to be ‘exclusive of VAT’ and allow the seller to reclaim the VAT from the buyer.
So, why did the standard conditions not protect the seller in this case?
The Court decided that the purchase price was deemed to include VAT because:
- The contract was silent on the issue and because the parties did not intend VAT to be charged. The Court formed this view because the parties did not discuss VAT in the lead up to the completion;
- The seller was not expecting VAT to be paid and communicated, on completion, that ‘all of the sale monies of £130,000’ had been received; and
- The seller took 18 months before it requested the additional VAT from the buyer.
The Court therefore interpreted the contract as silent and the parties’ intention as to not charge VAT as a special condition of the contract. As with the majority of sale contracts, the special conditions prevailed over the standard conditions. The question is: was the contract’s silence (and the parties’ actions) sufficient to be considered a special condition, or should the default position of the standard conditions be relied upon in the absence of any express exclusion of VAT?
What could be learnt from this case?
To avoid this situation arising, all parties in a property transaction where VAT may be payable (i.e. not in a transaction involving residential property or a charity) should ensure that:
- They openly discuss VAT arrangements at an early stage and check whether the property is subject to a VAT election;
- State the purchase price as being “inclusive” or “exclusive” of VAT; and
- Include in the contract an express obligation to pay the VAT where payable.
*CLP Holding Company Limited v Singh  EWCA Civ 1103