Hi,
I need to understand the VAT treatment on assets on VAT Deregistration by a client. Let me set out the scenario
A client purchased a farm a number of year ago. No VAT was incurred on the purchase.
At a later date he applied for planning to convert a Barn on the site into a Furnished Holiday Let. The planning clearly stipulated that the same person can not reside in the property for more than 10 weeks.
Due to the above we advised the client that the builder undertaking the work must charge VAT at the Standard Rate. The client registered for VAT to claim back the VAT incurred on the project. Subsequently he has charged VAT on all the holiday lets.
The total cost of the project was approx £250k.
As the turnover does not exceed the VAT threshold the client would like to deregister for VAT.
My question is if he deregisters for VAT will he have to account for output VAT on the Value of the assets/property on the day of deregistration?
I have read a thread on a forum stating that if deregistration occurs after 3 years and the value of the project is less than £250k then no VAT is repayable to HMRC on deregistration, however I can not find the relevant HMRC guidance to support this. Is this true?
If his CAPEX exceeds £250k will being on the CGS scheme help?
If it helps he got planning in 2008, the building work was undertaken 2010, the property was let in 2011 and his VAT effective date is March 2010.
Regards,
Numan
Replies (3)
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Deregistration
HMRC guidance is at http://www.hmrc.gov.uk/manuals/vatscmanual/VATSC23600.htm
The three year rule applies from Completion of the property. Up to three years from Completion, the 'deemed supply' is standard rated. After three years, the 'deemed supply' is exempt, unless there is an option to tax.
There are two possible consequences:
- if the deemed supply is taxable, output tax is due at 20% of value at dereg;
- if the deemed supply is exempt, the CGS kicks in, and requires an adjustment to input tax on construction.
You will need to do the arithmetic, to decide which is the better option. Either way, I suspect, there will be a significant cost. The client may consider staying registered for VAT.
Deregistration
At deregistration there is a deemed supply. Three years after Completion, the deemed supply is VAT exempt, since there is no option to tax.
Notice 706/2, para 9.1 explains that the disposal of the Capital Item means that the item is treated as if it were used for the exempt purpose for the remaining complete intervals (years). There, after three years, there are 6 remaining intervals left. The multiplier is therefore 6/10; this is applied to the input tax claimed on construction. This is the amount of output tax to be accounted for.