VAT’s The Way To Do It

Just about to settle another professional negligence case.  I actually got instructed by a group of individuals last year who were all affected by the same problem.  I managed to settle them all but then belatedly, the Claimant decided to go after my final client,  Mrs B. 

Mrs B is an elderly lady who wanted to sell her house and move into an apartment.  Don’t think though that when I say elderly, she was anything other than sprightly!  Oh no, Mrs B likes to travel and spends most of her year away from home, visiting other countries, friends and family.  Her house was getting too big for her and the reality was, she needed a base from which she could jet off to other exotic destinations.

There was a new development being built in her seaside-resort home town.  It was a development of some forty flats with views over the sea, valet parking, swimming pool and gym facilities.  The flats themselves were spacious and just what Mrs B was looking for, especially as it was within her budget.  The only fly in the ointment was a planning restriction on the flats: they could be used for holiday lets only.  The town was obviously trying to drum up some tourist business.

This didn’t stop Mrs B or the other potential new owners of the flats.  All the potential lessees that I spoke to were aware of the restriction but were willing to take on the property as part of an investment.  To make sure, the property developer inserted a specific clause in each of the leases saying that the flat could only be used for holiday lets.  Each of my clients’ solicitors who were dealing with the purchase, were also aware of this restriction.

So, Mrs B (and the others) exchanged contracts.  There were two things about the contract.  Firstly, there was no completion date.  The property was still being developed and so it was a clause of the contract that, after practical completion, the property developer would serve a notice on all the contract-holders and they would complete the purchase within 30 days.  This is important as the solicitors were therefore aware that the property was a new development.

The second clause was buried deep in the contract.  It said that the contract would be subject to the Standard Conditions of Sale (Fourth Edition).  Everyone was happy about this but there is a little clause in those conditions of sale that nobody paid much attention to – at the time.  It said that any figures quoted in the contract were “exclusive of VAT”.

In 2007, the Developer served notice that the property was now ready.  All the contract-holders completed on the transaction and became new flat owners.  By then, it transpired that Mrs B would not be able to have the flat as her main home but she decided to keep it anyway as it seemed to be a good investment.

“Seemed to be” just about sums it up.  Two years after completion, the Developer (a company) went into liquidation.  Somebody at the liquidator’s office started to brush down the contracts for the purchase of the flats and found the obscure clause in the contract about the price being “exclusive of VAT”.  Even more importantly, he remembered the Value Added Tax Act 1994 has a clause in there that if new holiday flats are sold within three years of their development and the seller is registered for VAT, VAT must be charged on the sale price.

Guess what?  The developer was registered for VAT, the purchase price was deemed to be exclusive of VAT and so each of my clients got a demand from the liquidator for an additional 17.5% of the value of their property.

You can imagine how they felt.  Horrified would be an understatement.  One of the lessees did try to challenge this in the VAT Tribunal (yes, there actually is a tribunal that deals exclusively with VAT) but the tribunal confirmed that VAT was chargeable.

This is where I got involved.  In light of the tribunal decision, there was very little that we could do to defend the claim by the liquidator so, subject to checking each of the purchase files, it looked like we would have to bring a professional negligence claim against the legal firms who dealt with the purchases on the basis that there had been solicitors negligence.

On checking the solicitors’ files, it was clear that each firm had completely overlooked the issue of VAT.  To be fair to them, the solicitors involved were residential conveyancing solicitors and it is unusual for VAT to be involved in residential transactions. If a Commercial Property lawyer had been involved (on the basis that these flats were being purchased for investment purposes) then its likely they would have been more aware of the possible VAT consequences.

To add insult to injury, the solicitor acting for the original Developer didn’t even know himself about the purchasers’ liability for VAT.  They sent a completion statement to each of my clients at the end of the purchase transaction and it was entirely silent on the issue of VAT.

Each of the purchasers’ solicitors tried to argue that they weren’t negligent.  The main argument they tried to raise was that if eight firms of solicitors hadn’t noticed the problem, then surely it is not reasonable to suggest they were negligent to miss it?  Unfortunately though, as they were holding themselves out as reasonably competent conveyancing solicitors and the VAT point is one of statute, they didn’t get far with that argument.  In fact, they pretty much caved in when I served them with court papers.

And that is where I am with Mrs B’s case.  We got a letter of claim from the liquidator so I, in turn, promptly sent one off to the solicitors who represented Mrs B on the purchase. They responded by denying liability, the liquidator issued proceedings and just as I finished drafting some instructions to send to a barrister, a settlement offer came in from the negligent solicitors’ insurer.  It isn’t totally there yet: not only do I want the VAT and Mrs B’s legal costs but Mrs B will be charged the liquidator’s costs so I am holding out for those too.

But I’ll get them.

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