1 September 2014

The Court of Appeal has ruled in CLP Holding Company Ltd v Singh & Anor [2014] EWCA Civ 1103 that VAT cannot be added even though the contract specified the price as “exclusive of VAT”. The dispute concerned a commercial property on which the option to tax had been exercised, but the principle may apply to all contracts where VAT might or might not be chargeable (for example, insurance intermediary charges).

The price agreed for the property was £130,000 and that amount was paid by the purchaser. HMRC subsequently assessed the vendor for the VAT, and the vendor therefore sought recovery of that VAT from the purchaser. The purchaser refused to pay the VAT element, arguing that it had paid all that was due under the contract - despite the fact that the contract incorporated the Law Society Standard Conditions of Sale, including the condition that sums payable excluded VAT.

The Court concluded that there was a conflict between parts of the contract, and that the consideration of £130,000 paid was inclusive of VAT. The findings may apply only to the specific circumstances of this case, including the existence of an option to tax which was not revealed to the purchasers and the fact that those purchasers were individuals. Nevertheless, it is important to ensure that VAT is carefully considered in drafting contracts for supplies of goods or services where the addition of VAT may become necessary in the future.

Certain insurance intermediary services such as policy administration and claims handling may become taxable in the future as a result of the UK needing to implement the findings of the Accenture/Arthur Andersen Consulting judgment of the Court of Justice of the European Communities (CJEU) Case C-472/03, and insurers receiving such services may wish to limit their future exposure to 20% VAT by careful wording. Suppliers will wish to provide for the addition of VAT if the UK law changes, although this would give them a windfall in terms of recoverable input tax which has already been factored into the price. In practice a negotiated position should be reached and carefully specified.