This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.
A sale contract must clearly state if VAT is payable on the price.
CLP Holding Company Limited v Singh and Kaur [31 July 2014] concerned an attempt by a seller of property to recover VAT on the sale price and highlights the need for the contract and transfer to be clear that VAT is payable in addition to the sale price, where that is the case.
CLP had opted to "waive the exemption" from VAT in respect of its commercial property. This meant that if it sold the property, it was obliged to pay VAT to HM Revenue & Customs, which was chargeable by reference to the value of the "supply", being the transfer of the property.
CLP was negotiating with Singh and Kaur for the transfer of the property to the latter. The facts were unusual in that the sale price of £130,000 was paid to CLP long before any contract was exchanged. In correspondence, CLP's solicitors expressly acknowledged that it has received "all of the sale monies of £130,000". No hint was given that VAT might be payable on the price.
A sale contract was exchanged and there was a simultaneous completion. Prior to then, the £130,000 had been repaid to the prospective buyers before being paid over once again on exchange.
The contract referred to general conditions, but there were also special conditions which prevailed if there was a conflict with the general conditions. The special conditions specified that the price was £130,000 and contained no indication that the price was exclusive of VAT. They made it clear that £130,000 and no other sum was due on completion. However, the general conditions stated that an obligation to pay money included an obligation to pay any VAT chargeable in respect of that payment and all sums payable under the contract were exclusive of VAT.
After completion, HMRC asked CLP to pay them the VAT in respect of the sale. CLP relied on the general conditions to claim VAT on top of the £130,000. The buyers did not accept that they were liable to pay any additional sum in respect of VAT and the Court of Appeal agreed.
In interpreting the meaning of a contract, the matter is considered from the perspective of a reasonable person who has all the background knowledge, which would reasonably have been available to the parties in the situation in which they were at the time of the contract. The parties' subjective intentions are irrelevant.
CLP appeared not to have told the buyers that it had exercised the "option to tax". While the property comprised commercial premises, the buyers, being individuals, appeared unaware and had no reason to suppose that the transaction might be subject to VAT. The correspondence prior to exchange and the special conditions gave no indication that VAT would be payable on £130,000. The Court stated that the reasonable person would conclude that the parties intended that nothing was or could become payable over and above the specified price of £130,000. Therefore, the special conditions prevailed over the general conditions.
While the circumstances are somewhat unusual, they reiterate the need to be clear where VAT is payable in addition to the price and avoid contradiction in the contractual provisions. The sellers here will presumably have to account to HMRC for the VAT out of the £130,000 so receiving considerably less for the property than they envisaged.