Your VAT registration date – a warning

VAT registration and the capital goods scheme

The European Court has always held that the VAT system is designed to relieve businesses of the burden of VAT incurred in the course of their economic activities. That includes things they do prior to trading, such as buying assets, including land and buildings (see Rompelman, Case 268/83). The system works by allowing the deduction of input tax in these cases; as normally only a VAT-registered person can deduct VAT, this makes the timing of VAT registration all important.

Where a person buys land or buildings for their business prior to trading, the interaction between the registration rules and the capital goods scheme can make timing especially important.

A case study

The recent experience of one of my clients illustrates many of these points. The situation this client faced was not an unusual one. Let’s call the client Che Guevara Properties Ltd, or CGP.

CGP owned (and still owns) a number of residential properties which it lets, so it previously had no reason to be VAT-registered. It then became aware of an opportunity to buy a disused industrial building and its site. The previous owner had obtained outline planning permission to demolish the building and build 30 new houses. The stipulated time limits had been exceeded and the planning permission had lapsed. Nonetheless, when CGP enquired, the local planning authority indicated that it would still be sympathetic to granting new planning permission for residential development. So CGP bought the site for £400,000. There was VAT to pay on the property because the previous owner had opted to tax.

Having bought the property, the company demolished the existing building. Its agents then further explored the scope for residential planning permission with the local planning authority. Two years passed without significant progress being made. A third party approached CGP with an offer to buy the site.

What to do about VAT?

I advised the client to opt to tax the property and seek VAT registration with effect from the date CGP bought the site. There was ample documentary evidence that CGP had always intended to make taxable supplies. Originally its intention had been to make zero-rated supplies of new homes. The impending sale of the property would be a standard-rated supply.

HMRC initially responded by ruling out an effective date of registration earlier than a current date. It suggested an earlier date was unnecessary anyway, because CGP would not suffer any VAT loss because it could claim back VAT on services incurred within 6 months and on goods bought and still owned within 4 years of the effective date of registration. This response was either disingenuous or reflected a reprehensible ignorance of the capital goods scheme. If a person registers for VAT and has previously incurred VAT on a capital item that it still owns (such as land or buildings costing £250,000 or more, net of VAT), it is treated as not using the asset for taxable purposes for any years of ownership prior to registration. For CGP this would have meant a loss of 20 – 30{4d4ce266fc3e4eba58867cfaa33502a0b952edd6d2bda4b64db287cd6db87908} of the VAT it had incurred on the property.

The outcome

We advised the client to seek a review of HMRC’s decision to refuse to accept an earlier effective date of registration, citing not only UK VAT law but also Rompelman. The final response was very satisfying; the case was not even assigned to a reviewing officer. Instead HMRC registered CGP from the date it had originally requested.

There are many lessons to be learned from this client’s experience. Not least, don’t always listen to HMRC’s reassurances. And don’t take ‘no’ for an answer without first seeking independent advice.

To discuss how this may affect your clients or your business, or to talk about a VAT issue in general, please get in touch.
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