The circumstances were not typical (as the demand for VAT was not made by the seller until some time after the sale had completed) but even so this decision is an oddity - and, in at least one respect, questionable in its logic.
General principles about VAT in contracts
It is the responsibility of the supplier in a transaction to account to HM Revenue & Customs ("HMRC") with any VAT due. In a sale the supplier is the seller, in a lease the supplier is the landlord. VAT is not always due; sometimes it depends on whether the property is less than three years old and in other cases the issue is whether or not the seller or landlord has chosen to charge VAT - called the "option to tax".
If a contract is silent about VAT on the price or rent, then the normal rule is that the price or rent is inclusive of any VAT that is chargeable (unless there is a change in the law between the time when the contract was concluded and the date when the transaction envisaged by the contract completes). So if the price was £100,000, and the contract said nothing about VAT, £100,000 would be all that the buyer would have to pay - but, if VAT was chargeable, the seller would have to take £16,666 of that price and pay it to HMRC.
If a contract expressly states that the price is exclusive of VAT, with an obligation on the buyer to pay any VAT chargeable, then if VAT was chargeable the buyer would have to pay £120,000, the seller would keep £100,000 and the seller would pay £20,000 to HMRC.
The issue in last month's case was whether the contract wording was enough to oblige the buyer to pay VAT in addition to the price.
Decision in CLP Holding Co Ltd v Singh and Kaur
This was a sale of an English commercial property by CLP Holdings to Messrs Singh and Kaur for a price of £130,000. CLP had opted to tax, so VAT was chargeable.
Negotiations for the purchase began in 2002 and the purchase completed in August 2006. VAT was never discussed by the parties and was not charged at completion. However, it was covered in the contract - because the Standard Conditions of Sale (that applied to the contract) state that:
- all sums payable under the contract are exclusive of VAT
- any obligation to pay money includes an obligation to pay any VAT chargeable and
- completion of the sale does not cancel any liability to perform any outstanding obligation under the contract.
In late 2007 HMRC assessed VAT on CLP for the sale. In response to that, in March 2008 (more than 18 months after the sale had completed), CLP asked Messrs Singh and Kaur to pay the VAT. They refused.
The Court of Appeal decided that, in view of the particular circumstances, the proper interpretation of the contract (looking at what a reasonable person would have understood the parties to have meant) was that the price was inclusive of VAT.
At least one aspect of the court's logic is questionable. The court noted that:
- the general conditions (about all sums being exclusive of VAT and the obligation to pay any money including an obligation to pay any VAT chargeable) were inconsistent with the special condition in the contract covering the price, which was silent as to any VAT on the price and
- the contract stated that if there was an inconsistency between the general conditions and the express terms of the contract, then the express terms of the contract would prevail.
In the court's view, this meant that (taking into account the whole background to the transaction) the contract should be treated as being silent on VAT - with the consequence that the price was inclusive of VAT.
Arguably, the court's interpretation is not correct - on the basis that the general condition about all sums being exclusive of VAT applied to all sums, and did not exclude the price from its application and the special condition about price did not expressly say that the price was inclusive of VAT.
Always best to clear
Regardless of whether any element of the court's decision in this case is open to question, the case does highlight the importance of clarity in contracts. The clearer the expression of the intention of the parties, the less likely it is that the courts will become involved.
For VAT, a prudent seller or landlord would not rely on "exclusive of VAT" wording, but would state that any VAT chargeable is to be payable by the buyer or tenant in addition to, and at the same time as, the price or rent.