VAT is not my area and on Friday I met a potential new client where a review of her records has shown the following (Note I do understand VAT but NOT the finer details of partial exemption even though I have just read this morning notice 706 and got even more confused!)
The lady runs a small Ltd Company through which she supplies some consultancy services and also buys products (giftware) that are sold through an online only shop. (The giftware is low margin and makes a small loss as the business grows)
In the last year her income and costs per her 4 vat returns were as follows;
Sales £95k, output VAT £19k (sales were £90k giftware £5k consultancy) Purchases £83k, input VAT £16k
All good I thought. However in the last few months she has “diversified” and bought a residential property in the company (as there were funds in the company from earlier profits). The intention is to refurbish and sell on at a profit. Numbers are as follows (based on actual and forecasts)
• Property cost £100k •
Refurb costs £40k •
Resale price (in early 2015) £175k
Her bookkeeper has been entering on her system all the refurb. costs and claiming VAT in full (none claimed yet first return is 3 mths to 31 October). However when I was going through I had “exempt supply” bells ringing in my head. So I took as much data as possible and am doing my research now but am seeking help from the community – before I either a) advise her it is above me or b) seek a VAT expert to help – if I/she needs to that is as all might be OK??!
The refurb costs – actual so far and planned to end are mostly vatable (some labour that is not) and so there will be approximately £6k of input VAT incurred on this project which I first thought could not be claimed. Then however I see that if the VAT relating to exempt supplies is under £7.5k pa AND less than half of total of input tax it can be claimed. (and it would be as her giftware business input vat is £16k pa)
I then started reading notice 706 and cant now decide if it should “disallowed” now and claimed later on as part of the annual adjustment, or if some of the special rules should apply. In current quarters (during refurb) exempt will exceed standard but once complete - next quarter - standard supplies will then exceed exempt again. Also do I need to consider "VAT year" - she has been registered since 01 Jan 2009 - as to what exempt/non exempt matters to look into.
I am not after free advice just a heads up from those better versed than I to see if I am correct in my thoughts and are there other issues I have missed as I know VAT and property is also V complicated!
Thanks in advance
(note I understand this is to be a one off property transaction)
Related resources
Replies (3)
Please login or register to join the discussion.
Partial Exemption
You have explained the Pt/Ex rules fairly well. The de minimis rule (£7,500 input tax in a year) applies to a current year, ending March/April/May, depending on the VAT Return stagger. It may mean that you do not claim the VAT on the property refurb on the Return in which you incur it, but then reclaim it at the year end. You will also have to take into account any non-attributable input tax, which does not relate directly to either taxable or exempt supplies.
Stage 1 - current quarter - if the VAT on property refurn exceeds the de minimis limit (£625 pm), then you cannot claim it. Apply this logic to each subsequent Return.
Stage 2 - quarter in which you sell the property - any VAT attributable to taxable supplies can still be reclaimed, even though there is a higher proportion of exempt outputs. However, that will affect any non-attributable VAT (e.g: overheads).
Stage 3 - Annual Adjustment at Year End - calculate the directly attributable VAT on the property refurb; and also the proportion of non-attributable input tax., It may be possible to argue that the sale of the property is an 'incidental real estate transaction,' and so exclude the exempt outputs from this part of the calculation.
But, you should really have someone look at the calculations, to make sure the intricacies of Partial Exemption have been properly applied.
Thanks Les
I know it is "easy" for those in the know but I wasn't - although it would seem after 2 hours reading notice 706 I have picked up the "gist". Well done to HMRC on a comprehensive notice!
I think I can therefore go back to the lady and advise her based on this that there is a issue BUT as long as everything happens as planned she will be ale to get the vat - albeit in Apr 2015 the end of her VAT year
I think the calculations will need "double checking" as you mention.
Partial Exemption
John, feel free to PM me to have the calculations checked if that would be helpful.