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Intention versus Contract terms - an important VAT decision for high value contracts


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16th October 2014 

The recent decision in the Court of Appeal case for CLP Holding Company v Singh and others challenges the generally accepted position for contracts where the price is stated to be exclusive of VAT and means that anyone dealing with contracts should be extra vigilant in respect of VAT.

This is because it has been generally accepted that where a contract is silent on VAT the contract price is taken to be VAT inclusive so 1,000,000 would include 166,666 VAT. Whereas if the contract states the contract price excluding VAT the price would be 1,000,000 plus 200,000 VAT.

This is important especially where there may be uncertainty of VAT treatment of a transaction as the supplier will want to pass the VAT cost to the purchaser where possible rather than it being deducted from the contract price. For example in the case of sales of properties as a VAT free transfer of a going concern where the sale could become VATable if the purchaser does not meet certain conditions.

In the case for CLP Holding Company the sale price was agreed at 130,000 excluding VAT and the contract contained an obligation for any VAT chargeable to be paid by the purchaser. The property was sold VAT free and HMRC subsequently assessed for VAT which the purchaser sought from the buyer. The purchaser refused to pay the VAT and the matter could only be resolved by legal action.

The Court of Appeal ruled that the correct approach was to consider what both parties intended with regards to the contract price in the light of the two parties circumstances relationship and all relevant facts. As the parties intended that nothing would be payable in addition to the agreed specified purchase price the VAT could not be passed on by the vendor to the purchaser.

This highlights the fact that it is vital to ensure that the VAT implications and VAT treatment of a transaction are correctly understood before a transaction is completed rather than after the event as contract terms allowing VAT to be added if due may not offer full protection to the vendor. This could create significant exposures where high value contracts such as property transactions are involved.

If you or your client are entering into any form of agreement for a supply of land and property, or for any other supplies it would be worth giving our free VAT helpine a call to ensure that the VAT implications are understood pre completion or the contract being signed.

About the Author

The VAT People are leading VAT and Customs Duty consultants based in the North West of England. We work with a wide range of businesses throughout the UK as well as assisting our accountancy colleagues to unravel the thorny VAT issues for their clients. We are one of the UK's largest and most comprehensive sources of VAT and Customs advice, our consultancy team having over 140 years of experience in VAT and Customs gained in either HMRC or a Big 4 accountancy practice environment.

Call us on our VAT helpline 0800 077 4604 to discuss. All initial discussions are free with no-obligation.

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Article Published/Sorted/Amended on Scopulus 2014-10-27 08:21:55 in Tax Articles

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