Contract terms require careful attention and can be ineffective, despite being clearly phrased. The need to consider all the circumstances of a transaction has been highlighted in recent VAT cases, and errors have been costly.
The Court of Appeal in CLP Holding Company Ltd v Singh and another ( EWCA Civ 1103, published 2 October 2014) considered the contract for a property transaction. The vendor had opted to tax the property in 1989, but sold the property in 2006 without charging VAT. HMRC later assessed the vendor for output VAT on the supply of the property. The courts were asked to decide whether the purchaser was under an obligation to pay this VAT as part of its purchase price.
The vendor relied on a protective clause in the contract which stated that “all sums made payable by the contract are exclusive of value added tax”. The first impression therefore is that the purchaser would be required to pay the VAT which was found to be chargeable on the supply.
However, the Court of Appeal noted that the above clause was not supported by the rest of the contract and found many other deficiencies in practice. It concluded that the purchaser was not in a position to consider that VAT would be charged by the vendor and ruled that the contract price was VAT-inclusive, despite an express term to the contrary.
Although the vendor had thought it was protected by the general clause referring to prices being VAT-exclusive, the Court stated that “the contract must be interpreted as a whole in the light of all of the circumstances of the parties’ relationship and the relevant facts surrounding the transaction as known to them.” This will include how the parties interact and behave over the course of the transaction. Therefore, not only should the option to tax be tracked by the vendor for as long as it remains in force, but the negotiations and the drafting of the agreement must also be carefully considered particularly when taxes or other amounts might be payable in addition to the sale price.