A recent Court of Appeal decision (CLP Holding Co Ltd v Singh and Kaur[1]) serves as a reminder to consider VAT during sale negotiations, and ensure that VAT wording in contracts is sufficiently clear.

The facts of the case are slightly unusual, and the decision surprising in some respects (at least at first glance).

  1. The Seller sold a commercial property freehold to the Buyer for £130k. Although the Seller had opted to tax the property for VAT purposes, the Seller made no mention of this (and it seems the Buyer did not ask the question) at any point during the protracted negotiations. Some time after completion of the sale, once HMRC had assessed the Seller for the VAT, the Seller asked the Buyer for the VAT on the purchase price.
  2. The sale contract incorporated the standard conditions of sale (4th edition), even though the sale was of commercial property. The incorporated standard conditions stated that (i) any obligation to pay money includes an obligation to pay any related VAT, (ii) all sums payable under the contract were exclusive of VAT, and (iii) any liability to perform an outstanding obligation under the contract survives completion. However the special conditions, which took priority over any conflicting standard conditions, defined the "Purchase Price" as simply £130k.
  3. The Court held that the sale contract, properly construed, did not oblige the Buyer to pay the VAT amount. The Seller therefore had to account to HMRC for VAT out of the £130k.
  4. The Court's reasoning was that it is necessary to consider what a reasonable person, with "all the background knowledge" at their disposal, would have understood the contracting parties to have meant. Of critical importance to the Court seems to be that, on the facts of this case, the purchase monies were agreed and paid a considerable time prior to completion. The Seller, through its lawyers, confirmed that it had received "all of the sale monies of £130k on this matter", with no mention of VAT. In response to the standard requisition seeking confirmation of the exact amount payable on completion, there was again no mention of VAT.

The decision can be found here.