The client constructed a mixed-use building, commercial on ground floor and residential above. The client expected to make only taxable sales (standard-rate lets of ground floor/zero-rated long leases of new residential). Accordingly, it reclaimed VAT in full.
Due to economic conditions the client decided to let the residential units for a year to generate income and allow market conditions to improve. This resulted in VAT exempt income. As this preceded any taxable supply is the building an HMRC inspector identified £800,000 of over claimed VAT.
Constable VAT’s solution
- Identify large amounts of VAT that could be removed from supplier’s charges in respect of the residential part of building – obtain rebates from suppliers.
- Identify previously unrecognised taxable supplies that prevented HMRC arguing for an initial disallowance of correctly charged VAT (e.g. part of the site had been let for car parking).
- Persuade HMRC that, the timing of material supplies at 2 prevented a disallowance of claims made, after adjusting for 1) and that any disallowance was under the Capital Goods Scheme at a rate of £8,000 per annum for each year the exempt letting continued. Total client saving £790,000.
The client had not required suppliers to apportion charges between zero-rated and standard-rated elements in the belief that this delivered no benefit (VAT being reclaimable). This increase the risk it was exposed to significantly. Whilst there was no mandatory apportionment requirement for some costs, this also presented the risk of a disallowance of VAT even under the client’s original plans (VAT charged in error being non-deductible).
It was the fine detail of investigations identifying (previously unrecognised) taxable supplies that changed the dynamics of the recovery position. Until our investigation both HMRC and the client were focused wholly on the letting of residential and commercial units in the completed new building. The taxable supplies we identified were very low value incidental transactions that were easily overlooked.