Big VAT savings on a mixed-use property development

Background

The client constructed a mixed-use building, commercial on the ground floor and residential above. The client expected to make only taxable supplies (standard-rated lets of commercial property/zero-rated long leases of new residential). Accordingly, the client reclaimed VAT in full.

The Issue

Due to economic conditions, the client decided to let the residential units for a year to generate rental income and allow market conditions to improve. This resulted in Vat exempt income. As this preceded any taxable supply of the building, an HMRC officer identified £800,000 of overclaimed VAT.

Constable VAT’s Solution

  1. Identify large amounts of VAT that could be removed from supplier’s charges in respect of the residential part of the building – obtain rebates from suppliers.
  2. 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).
  3. Persuade HMRC that the timing of taxable supplies identified at 2) above prevented a disallowance of VAT claims made, after adjusting for 1) and that any disallowance was under the Capital Goods Scheme at a rate of £8000 per annum for each year the exempt letting continued. Total client saving £790,000.00.

Illustrative Points

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 increased 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 is 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.