Monthly Archives: August 2015

Input tax on goods sold Pre VAT registration: was input tax recoverable?

To what extent can a business make a claim to offset input VAT incurred on supplies which it received for the purpose of its business prior to being registered for VAT?

UK law, which restricts a non-registered trader from claiming input tax incurred prior to registration, is based on the EU Principal Directive (2006/112 EC).

The Schemepanel Trading Limited v Customs & Excise Commissioners [1996] case concerned supplies made to a building contractor, in the form of staged supplies during which time the taxpayer became VAT registered.

The taxpayer claimed input tax on supplies made and used by it before VAT registration, based on it being unnecessary to be VAT registered at the time when supplies were used in order to reclaim input tax.

It was held, by reference to higher decisions including Customs & Excise Commissioners v Apple & Pear Development Council [1985] and BLP Group plc v Customs & Excise Commissioners [1995] that it is a basic principle of VAT that input tax can only be deducted in respect of supplies which are subject to output tax: they have to be “the cost components” of the supply on which output tax is charged.

This is based on the fundamental principle of VAT that input tax should only be claimed to the extent that it can be attributed to the making of taxable supplies, so supporting the principle of fiscal neutrality.

Regulation 111 of VAT Regulation SI 1995/2518, (the “VAT Regulations”) also reflect this principle but within certain limits allow that there can be a time lapse between the receipt of supplies and the making of supplies by a taxable person. But that regulation can have no application where goods have been bought and sold before registration.

In Earl Redway (t/a Loktonic) v Revenue & Customs (VAT – SUPPLY : Pre-registration) [2015] Mr Redway’s on-line business was registered for VAT on 4 January 2014. Mr Redway claimed input VAT relating to goods bought before 4 January 2014. HMRC allowed a percentage of that claim on the basis that some of those goods had been bought but not sold prior to 4 January 2014 and so could be treated as “stock in hand” at the time of registration. Input tax for such “stock in hand” could be re-claimed under Regulation 111 of the VAT Regulations. However they refused any input tax re-claim for goods which had been bought and sold before registration.

The supplies for which he was claiming input tax had not been used to make taxable supplies, they had been used to make supplies while Mr Redway was treated as exempt from VAT prior to registration.

The goods to which the disputed input VAT related had been both bought and sold before Mr Redway’s VAT registration for VAT. None of them could be treated as “stock in hand” at the date of the VAT registration.

Those supplies did not form part of any kind of taxable supply made by Mr Redway so the exceptional time limits in Regulation 111 did not apply.

So the input tax could not be re-claimed. For these reasons HMRC’s refusal to repay input VAT was confirmed.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Extension beyond deadline: time no longer of essence

In the Court of Appeal case of Buckland v Farmer and Moody [1979] Buckley LJ said of breaches of contract: “If the party who is in the right allows the defaulting party to try to remedy his default after an essential date has passed, he cannot then call the bargain off without first warning the defaulting party by fixing a fresh limit, reasonable in the circumstances.”

He was citing Goulding J in the old case of Luck v White.

Therefore, in such circumstances the claimant could not simply pull the plug on the contract without fixing a new date that was reasonable in the circumstances.

In the High Court case of Hakimzay Ltd v Swailes [2015] the buyer had bought with vacant possession and served a notice to complete when this could not be provided.

This made time of the essence to complete by a certain date which was not complied with.

The buyer came up with proposals to allow the seller more time but wanted £10,000 off the price as compensation for having its money tied up unproductively with its solicitor.

But now having got the last tenant out, the seller sought to cancel the contract.

The court said the seller could not now just turn round and say, “I require you to complete forthwith. If you cannot, I shall terminate on account of your repudiatory breach, because during this continuing period after expiration of the notice to complete time remains of the essence.”

So the seller was not entitled to serve his notice of rescission of the contract, which was accordingly ineffective to bring the contract to an end.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Operation of extension of time provisions not pre condition to liquidated damages claim

Can it be said in absolute terms that any failure on the part of a Contract Administrator (“CA”) to operate the extension of time provisions under a building contract prevents a claim for liquidated damages?

In the High Court case of Henia Investments Inc v Beck Interiors Ltd [2015] the Claimant, Henia Investments Inc (the “Employer”) sought declarations concerning its building contract (“the Contract”) with Beck Interiors Ltd (“the Contractor”) in relation to an Application for an interim payment that the Contractor had issued.

The Contract was the JCT Standard Building Contract without Quantities 2011 as amended.

One of the issues was whether a failure on the part of the CA to make a decision in respect of a contractually compliant application for extension of time rendered the CA’s Non-Completion Certificate invalid or otherwise prevented the Employer from deducting and/or claiming liquidated damages?

The court actually decided the case on other grounds but as a non binding aside it said the language of the principal liquidated damages provision, Clause 2.32, did not suggest that the CA fulfilling its duty to operate the extension of time provisions was a condition precedent to the Employer’s entitlement to deduct liquidated damages.

It seemed odd that, if there was to be a condition precedent that no liquidated damages should be payable or allowable unless the extension of time clauses have been operated properly, it was not spelt out as such.

This was more especially the case as Clause 2.32.1 expressly imposed two other conditions precedent, namely the need:

– for the CA to have issued a Non-Completion Certificate for the Works and

– for the Employer to have notified the Contractor before the date of the Final Certificate that he may require payment of, or may withhold or deduct, liquidated damages.

The lack of any precondition as to the extension of time clauses having been operated properly could be explained commercially by the facts that:

1. There can be serious arguments between the Contractor and the CA (as there were here) not only as to whether delays have occurred by reason of which extensions of time can be granted but also as so as to whether the Contractor has properly complied with the notification and particularisation requirements required by Clause 2.27.

2. The extension of time application may range from being a wholly good to a hopeless one or it may relate to the whole of the delay or only a very small part.

In short, there may turn out to be no or only a limited entitlement to an extension of time, leaving intact all or most of the Employer’s liquidated damages entitlement.

3. The Contractor is not left without remedies which, in the short term, it can pursue through adjudication and in the long-term final dispute resolution processes.

It can challenge the refusal to grant an extension and/or the deduction of liquidated damages and, in the case of adjudication, secure relief if it can persuade the adjudicator that it is appropriate and that the Employer and the CA are wholly or partly in the wrong.

It could be argued that it is unfair on the Contractor to have liquidated damages deducted at a time when the CA has failed to consider extension of time claims. The answers to that were:

A the ready availability of those short and long-term remedies

B the existence of numerous potential defaults on the part of both Employer and Contractor which could cause serious financial consequences for the other and

C the mere fact that unfairness could happen in the short term does not necessarily or obviously require clauses to be interpreted to be conditions precedent to the ability of either party to secure such financial advantage in that short term.

So a failure on the part of the CA to operate the extension of time provisions did not preclude the Employer from deducting liquidated damages where the explicit conditions precedent in Clauses 2.32.1.1 and 2.32.1.2 have been complied with.

However under other building contracts, if the effective operation of extension of time provisions is clearly a condition precedent it may be a precondition to the Employer’s claim for liquidated damages.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

In public interest to wind up empty rates mitigation scheme

Section 45 of the Local Government Finance Act 1988 imposed a national non-domestic business rate (“NNDR”) upon hereditaments if 4 conditions are satisfied. For a start the hereditament must fall within a class prescribed by regulations. Regulation 3 of the Non Domestic Rating (Unoccupied Property) (England) Regulations 2008 (“2008 Regulations”) prescribed all non-domestic hereditaments apart from those exempted by Regulation 4. Regulation 4(k) of the 2008 Regulations exempted:

“Any hereditament…whose owner is a company which is subject to a winding up order made under the Insolvency Act 1986 or which is being wound up voluntarily under that Act”.

In the High Court case of Secretary of State for Business Innovation And Skills v PAG Management Services Ltd [2015] PAG Management Services Limited (“PAG Management”) was incorporated to manage and coordinate a NNDR mitigation scheme to exploit this exemption for the benefit of associated companies in its Group and third party clients.

The scheme operated as follows:

1 PAG Management incorporated a special purpose vehicle (“SPV”);

2 PAG Management’s client companies immediately granted leases of the vacant properties to the SPV;

3 The leases were outside the business tenancy protection given by the Landlord and Tenant Act 1954. There was no premium. Usually they were for a 3 year term at a rent of £1 per annum terminable on 7 days’ notice. A director of one of the major scheme users, recognised this was “unfeasibly short” for a business tenant in actual occupation;

4 At the same time as the leases were granted the landlord waived the right to receive sums under the leases;

5 At the same time as the leases were granted the SPVs were placed in members’ voluntary liquidation. This was possible because the landlords’ waiver enabled the directors of the SPVs to make a statutory declaration of solvency;

6 The SPVs were now exempt from NNDR as companies in members’ voluntary winding up;

7 In each case PAG Management’s client company (the landlord) was not in occupation of the hereditament. The existence of the lease precluded its right to occupy;

8 The members’ voluntary liquidation proceeded slowly;

9 Under a fee agreement the Landlord paid PAG Management a percentage (15% – 40%) of the NNDR saved at a result of the lease being in place; and

10 The landlord refurbished and/or marketed the property. If a tenant was found the lease to the SPV was terminated and the new tenant took occupation, without any “empty rates” having been paid in the meanwhile.

The Secretary of State sought the winding up of PAG Management on a number of grounds. The successful one’s were an amalgam of “abuse of the insolvency legislation” and “lack of commercial probity having regard to the elements of the scheme”.

The court said the business of PAG Management necessarily involved:

– the creation of companies which existed for no purpose other than immediately going into liquidation.

– the creation of assets for no purpose other than their being held by those companies in liquidation but recoverable by the freeholder if the freeholder could turn them to advantage;

– PAG Management making arrangements for effective control over the liquidations to facilitate the maintenance in being of those assets; and

– the exercise of that control to secure that the liquidations continue rather than get concluded to shelter the assets so that PAG Management might earn fees.

This ran counter to the true purpose of liquidation which was the collection, realisation and distribution of assets in satisfaction of the claims of creditors and the entitlements of members.

Any adjustments legislation made to third party rights (including tax exemptions) were made to achieve that purpose.

There was a clear public interest in ensuring that the real purpose of liquidations was not subverted by treating a company in liquidation as a shelter (and seeking to prolong its continuation as such).

This misuse of the insolvency legislation demonstrated a lack of commercial probity. It its own way it also “subvert[s] the proper functioning of the law and procedures of bankruptcy”.

The business of PAG Management involved creating artificial leases incorporating elements of pretence, and the use of placemen to distance PAG Management’s owners and managers from the liquidation process. This suggested an awareness that necessary elements of PAG Management’s business might be thought improper and have to be disguised. These elements supported the court’s holding that PAG’s business lacked commercial probity.

PAG Management itself was an active and solvent business. That business involved the promotion of an NNDR mitigation scheme. Of itself the promotion of tax mitigation schemes was not an inherently objectionable activity.

But in the course of so doing:

– it used artificial leases having no commercial reality and containing some terms which were mere pretences;

– having procured that the companies it had created entered liquidation, it had delayed appointing new officeholders.

These would not of themselves be of sufficient weight to warrant a winding up. But PAG Management’s business model involved a misuse of the insolvency legislation and it was just and equitable to wind up the company. The court should exercise its discretion conferred by 124A of the insolvency Act 1986 to wind the company up.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Tail piece to planning condition may subvert democratic and statutory planning processes

In a planning condition attached to a planning permission, a “tailpiece” to that condition may on it’s face enable development to take place which could be very different in scale and impact from that applied for, assessed or permitted.

It thereby purports to enable a development to be carried out in a way that bypasses any statutory planning process.

In R (Midcounties Co-operative Ltd) v. Wyre Forest DC [2009] outline planning permission was granted for a new class A1 supermarket. The description of development in the planning permission did not specify the floor space permitted, but the application incorporated the specifications of floor space.

Condition 6 of the planning permission granted provided that the food store approved should not exceed the specified maximum “unless otherwise agreed in writing with the Local Planning Authority.” The High Court held that the tailpiece to condition 6 was unlawful as it undermined the effect of specifying floor space limits. Worse still the condition could not be severed from the planning permission. The floor space limits were of central importance.

In Hubert v Carmarthenshire County Council [2015] condition 21 to the grant of planning permission was that the wind turbine approved should be 40 metres to the centre of the hub and 67 metres to blade tip, unless given the written approval of the local planning authority.

The High Court ruled that the Midcounties principle applied here, the tailpiece to the condition was bad. The officer’s report had recognised the importance of the turbine’s dimensions, but condition 21 as drafted allowed all the safeguards to be sidestepped.

Given the centrality of condition 21 to the subject matter of the permission and the significance of the turbine’s dimensions to it’s environmental effects. The words of the tailpiece would permit variations in height so that the scale and impact of the turbine would be different from that covered by the planning permission actually granted.

The breadth of the words used in the condition meant that it could not be interpreted as being restricted to minor variations.

The condition allowed variations, up or down, and without any restriction either way, from the dimensions the Council had assessed and specified.

Indeed, the permission itself admitted that the conditions imposed could permit something different from that applied for because it expressly said that the development being permitted was that defined in the application materials “unless amended by any attached condition”.

It would be quite wrong for the planning permission to be the subject of public debate and democratic decision-making in the Council, only then to be capable of being side-stepped by use of the tailpiece. The tailpiece was therefore unlawful and had to be severed from condition 21.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Ministerial Statement on reduced affordable housing requirements for small developments lawful

The Secretary of State for Communities and Local Government made a decision on 28 November 2014 to alter national policy in respect of planning obligations for affordable housing and social infrastructure contributions.

This was done using a Written Ministerial Statement (“WMS”) in the House of Commons.

On 10 February 2015 the Secretary of State decided to keep those policy changes following an Equalities Impact Assessment.

The Ministerial Statement policy changes were accompanied by changes to the National Planning Practice Guidance.

No amendments were made to the National Planning Policy Framework.

The WMS said:

(1) Developments of 10 units or 1000 sq m or less (including annexes and extensions) would be excluded from affordable housing levies and tariff based contributions;

(2) A lower threshold would apply in designated rural areas, National Parks and Areas of Outstanding Natural Beauty (as defined in section 157 of the Housing Act 1985), with developments of 5 units or less to be excluded from affordable housing levies and tariff based contributions. Development of between 6 and 10 units would be subject to a commuted sum payable on or after completion;

(3) Where a vacant building is brought back into use or demolished for redevelopment, local authorities will provide a “credit”, equivalent to the floorspace of the vacant building, to be set against affordable housing contributions.

In the case of West Berkshire District Council Reading Borough Council v Department for Communities And Local Government [2015] the High Court said a prerogative power cannot be exercised incompatibly with, or so as to frustrate, the relevant statutory scheme. The Secretary of State’s common law powers to promulgate planning policies cannot be used incompatibly with the statutory code.

In breach of these principle the WMS purported to create immediate exemptions from affordable housing requirements in adopted local plans. It claimed to do so for all small housing developments in England, without making any distinction between existing or future local plan policies.

The national policy changes introduced on 28 November 2014 were inconsistent with certain core principles of the statutory scheme.

So, it was not surprising that officials had advised Ministers on the possible need for primary legislation in order to create the exemptions they wanted to achieve.

The purported effect of the new national policy on exemptions from affordable housing contributions was incompatible with the statutory framework of the Town and Country Planning Act 1990 and Planning and Compulsory Purchase Act 2004 and therefore unlawful.

On appeal the Court of Appeal, allowing the appeal on all counts, said the new national policy on exemptions from affordable housing contributions was not incompatible with the statutory framework of the Town and Country Planning Act 1990 and Planning and Compulsory Purchase Act 2004 and was therefore lawful based on two principles:

1. “The exercise of public discretionary power requires the decision-maker to bring his mind to bear on every case; he cannot blindly follow a pre-existing policy without considering anything said to persuade him that the case in hand is an exception.” But:

2 “a policy-maker (notably central government) is entitled to express his policy in unqualified terms. He is not required to spell out the legal fact that the application of the policy must allow for the possibility of exceptions.”

The policy stated in the WMS was not to be faulted because it did not say that it was not to be applied in a blanket fashion, or that its place in the statutory scheme of things was no more than a material consideration for the purposes of s.38(6) of the Planning and Compulsory Purchase Act 2004 and s.70(2) of the Town and Country Planning Act 1990, to be viewed alongside adopted development plan policies. It did not countermand or frustrate the effective operation of those provisions. The High Court Judge had conflated what the policy in the WMS said with how it could be lawfully deployed.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Enforcement notice only partially superceded by planning permission

In an operational development case there may be more than one unauthorised building or in an unauthorised use case there may be a mixed uses on different parts of the site.

An enforcement notice requiring all the buildings to be demolished may be followed by a planning permission to retain one of the buildings.

In an unauthorised use case, an enforcement notice may be followed by planning permission to carry on that use in one part of the site.

There is no rule that the steps in an enforcement notice have to be exercised in full for it to remain effective.

If it were otherwise, a landowner could totally frustrate the effect of an enforcement notice against the unauthorised construction of a building, by obtaining a planning permission for the retention of a smaller building which includes an element of its predecessor.

Section 180 of the Town & Country Planning Act 1990 (“the 1990 Act”) protects from enforcement any development which has had an enforcement notice made against it, and then is the subject of a planning permission, if and to the extent that the retention of that development is not at variance with that later planning permission.

The effect of Section 180 is to cancel the effect of an enforcement notice, but no more or less than than the notice is “inconsistent” with a later planning permission “for any development”.

Section 180 causes the notice to “cease to have effect so far as inconsistent with that permission”.

The protection afforded by section 180 does not depend upon the implementation of the later planning permission. It is triggered by the very fact that the later planning permission is granted.

Nor does Section 180 require that the site in respect of which the planning permission is granted, after the enforcement notice, must be identical to the site against which the enforcement notice has been served.

Nor does Section 180 require the development covered by the later planning permission to be exactly the same as is the subject of the enforcement notice.

Nor does the imposition of conditions on that permission restricting or regulating the development detract from the overriding effect of the later permission.

These principles apply whether the later planning permissions are permissions for changes in the use of land or permissions for operational development.

If a local planning authority serves an enforcement notice against an operational development and planning permission is later granted, the issue for Section 180 is whether or not, and if so to what extent, the enforcement notice is inconsistent with that permission?

The main question is not whether the later planning permission permits the unauthorized development to be retained on its own, but whether there are elements of development common to both the permission and the enforcement notice.

If there is fabric which forms part of what the planning permission approved, the enforcement notice cannot thereafter be relied upon to attack that much of the development. There may be parts of the development subjected to the enforcement notice which are physically subsumed in the development for which planning permission is later granted.

However, the enforcement notice will remain effective against so much of the fabric as is not approved by the later planning permission.

An unauthorised vertical structure permitted up to 7 metres high on a particular alignment is consistent with a later permitted structure of similar materials 10 metres tall on the same alignment, even if some adaptation and further construction will be needed in order to incorporate the original 7 metres into the taller development covered by the subsequent permission. There is no need to take the original 7 metre wall down in its entirety only to be put up again on the same alignment and using the same or similar materials.

In Goremsandu v Secretary of State for Communities and Local Government & Anor [2015] a pitched roof and an area projecting beyond the building line, part of property subjected to an enforcement notice, were not to be retained in the development later covered by planning permission so the Court of Appeal said the demolition of those parts could not be inconsistent with the permission.

Indeed the permission was designed to achieve the removal of those unacceptable elements, and the retention of that which was acceptable.

So notwithstanding the operation of Section 180 on the remainder of the development, the enforcement notice still required removal of the pitched roof and the projecting part of the extension.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.