Retrospectively approving an option to tax

The FTT has held that a taxpayer was not entitled to appeal against HMRC's decision to approve retrospectively an option to tax made by the taxpayer: Rolldean Estates v HMRC [2023] UKFTT 359. In any event, the taxpayer was estopped from raising the argument that the option to tax was not valid by virtue of its own conduct in confirming (incorrectly) that no exempt supplies had been made in relation to the relevant property.

In addition, the FTT held that the fact that the relevant power to treat an option as valid in such circumstances did not come into effect until after this option was exercised did not prevent HMRC from applying it to the option with prospective effect.

Background

Rolldean acquired a property in 2006 but did not immediately opt to tax the property. Following an HMRC visit in 2008 and at HMRC's suggestion, Rolldean opted to tax the property and notified HMRC of the fact. In its application and subsequent replies to queries raised by HMRC, it confirmed that it had not used the property to make exempt supplies prior to opting the property.

In 2015, Rolldean disposed of the property but did not charge and account for output VAT despite the option to tax. When assessed by HMRC, Rolldean argued that its original option was not valid on the basis that it had in fact made exempt supplies prior to exercising the option to tax. VATA 1994 Schedule 10 para 2 provided that a taxpayer is not entitled to make an option in such circumstances unless the conditions for automatic permission were met or they obtain written permission from HMRC. Rolldean pointed out that it had not obtained written permission from HMRC and it also argued that HMRC had been aware of the prior exempt supplies from its enquiry visit in 2008.

In those circumstances, HMRC decided to utilise its power in Schedule 10 para 30 dispense with the requirement for their prior permission so as to treat the option as validly exercised with retrospective effect. Rolldean sought to appeal the use of the power in these circumstances as unreasonable.

FTT decision

The first question was whether HMRC could, in the circumstances, utilise the para 30 power. This power was added to Schedule 10 with effect from 1 June 2008, but the option to tax was made in January 2008. Rolldean argued that the power could not be used in relation to an option made prior to when it came into effect. The FTT rejected this argument. The changes made to Schedule 10 adding para 30 had effect in relation to supplies made after 1 June 2008. As such, whilst the power to treat the option as validly made could only have effect in relation to supplies made from 1 June 2008, there was nothing to prevent it from operating in relation to options made before that date. Since the disputed supply in this case took place in 2015, HMRC's dispensation of the need for prior written permission was effective in relation to that supply (though it would not have had effect for supplies before 1 June 2008).

Secondly, the FTT considered whether Rolldean had any right of appeal in relation to HMRC's decision to exercise the power in para 30. The FTT noted that VATA 1994 s.83(wb) provides that a person may appeal "any refusal of the Commissioners to grant any permission under, or

otherwise to exercise in favour of a particular person any power conferred by, any provision of Part 1 of Schedule 10". Despite the fact that HMRC argued that the taxpayer did have a right of appeal in this case, the FTT disagreed. Section 83(wb) provided a right of appeal against a refusal to exercise any power in favour of a taxpayer. This made it clear that the right of appeal exists where HMRC refuse to do something which a person has asked them to do. Here, HMRC had not refused to do anything, they had simply deemed the option to have effect. There was no basis for giving the provision a wider meaning simply on the basis that the analysis meant that the decision could only be challenged by judicial review.

The FTT did, however, go on to point out that in (more normal) circumstances where a taxpayer applies for HMRC to exercise their power under para 30 to treat an option as validly made, they would have a right of appeal against HMRC's refusal to use that power.

Thirdly, the FTT went on to consider whether (if it were wrong on the jurisdiction issue), HMRC had acted unreasonably in exercising its power under para 30. On this issue, Rolldean argued that HMRC had failed to take into account the fact that HMRC were themselves aware of the exempt supplies made prior to the making of the option (a matter that the FTT found as fact). HMRC, in turn, argued that Rolldean were estopped from relying on this point due to its confirmation in its notifications to HMRC that it had not made exempt supplies. The FTT agreed. The situation fell within the scope of "estoppel by convention" set out by the Supreme Court in Tinkler v HMRC [2021] UKSC 39. Rolldean's explicit confirmations that it had made no exempt supplies "crossed the line" and objectively led to a common assumption that there was a valid option in place which was confirmed by later mutual dealings where Rolldean recovered input VAT on costs relating to the building. The fact that an officer at HMRC knew of the exempt supplies and that this had not been taken into account when the option to tax was made did not prevent the estoppel from operating.

In any event, the FTT considered that HMRC had acted entirely reasonably in issuing the decision to treat the option as validly made.

Comment

This case throws up a couple of unusual features. Firstly, the fact that HMRC argued that for a wide interpretation of the taxpayer's right to appeal which the FTT rejected in favour of stricter reading of the provisions. And secondly, a taxpayer seeking to rely on it own notification failures to (in effect) disapply its option to its own advantage. It can be no surprise that the FTT found a way (in fact three ways) to reject the taxpayer's appeal in these circumstances.