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Deregistering for VAT.

Commercial property

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Hi All,

Not my area of expertise so I'd massively appreciate any input. 

A partnership (sisters) buy a commercial building that happens to have a flat above.

VAT was on the purchase so they registered in order to claim the VAT back. 

They used it as a workshop before deciding to rent the space out and it was changed to a bar the new tenant. 

At this stage (I know it's important) I don't know if the seller opted to tax or they did. 

My limited understanding is that if they opted to tax and they deregistered they would have to pay the tax back. But if the seller opted to tax they could deregister without paying the VAT. If they did opt to tax, they could revoke this after 20 years. 

Their current accountants are saying that they can deregister after four years but I can't find any reference to this.

Thanks in advance for any input. 

Replies (6)

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By Jason Croke
26th Jan 2022 09:28

When the partnership bought the shop/flat above, you say that VAT was on the purchase so they registered for VAT and reclaimed the VAT the seller charged.

This confirms that the seller had opted to tax (well, it confirms the seller charged VAT, they may not have formally notified their option to tax to HMRC but as the seller has charged VAT then we have to assume there was an option/de facto option).

The option to tax does not transfer over from seller to buyer. The option always remains - for 20 years at least - with whoever has made the option (the seller), so you could have a seller who sells their opted building and then the following year buys it back again, they don't need to opt again, they'd already opted it.

As the option does not transfer to the buyer, then the buyer has to make their own option to tax, whether the buyer opts depends on what they are doing with it, if using it in their own taxable business they don't need to opt, but the moment they started renting, they are making an exempt supply of rent and that puts at risk the VAT reclaimed originally when it was purchased.

When the partnership rented the space as a bar to a tenant, did they charge VAT?

How much did the pay for the shop/flat, how much VAT did they reclaim, you say they used it as a workshop - was this for their own business needs/was those business needs the same as the business description on the VAT registration? When they started renting when was that, etc.

Certainly IF the partnership opted to tax the property - and that could be formally to HMRC or accidently by charging VAT on rent, then when deregistering they would have to declare output tax on the market value of the property within the 20 year life of the option to tax.

Not sure where the four years deadline is coming from, I suspect the partnership has reclaimed VAT on the purchase they were not entitled to reclaim (or entitled to reclaim up until they rented the unit) and there is a four year window for declaring errors/overclaimed VAT, so maybe the accountants are saying that four years have passed since they VAT was wrongfully reclaimed but it's okay now.

I'd disagree, depends on the purchase price of the property, if it was over £250k then the deadline is 10 years, not 4 (under capital goods scheme).

if the flat was being rented, that is an exempt supply and so the VAT registered partnership must was required to perform partial exemption adjustments to apportion any input tax and suspect that hasn't been done, perhaps another reason why the Accountants are focusing on the 4 year/outside the time limit to declare errors deadline.

Thanks (3)
Replying to Jason Croke:
By mrme89
26th Jan 2022 09:52

Thank you for such a detailed reply.

Yes, they charge VAT to the tenant.

I’m not sure of the purchase price, but they paid approx. £17,500 in VAT.

It was originally used for their own business needs; a wedding supplies shop selling standard rated goods and services.

The purchased the shop in 2019 and started renting it out some time in 2020.

As they’ve charged VAT on rent. Could they claim it was a mistake and send credit notes and reissued invoices to the tenant, with an amendment to their VAT return? They don’t remember doing a formal election.

The accountant is saying that they can’t deregister for four years without it resulting in the repayment of VAT.

The flat is part and parcel of the bar (rented as one) and is now used as the kitchen so serve food from.

The problem they have is that they were advised to register for VAT despite being under the threshold to enable them to reclaim the VAT. The core business has never approached the VAT threshold and it is now becoming a burden.

Thanks (0)
By Jason Croke
26th Jan 2022 10:30

The original advice to register for VAT (to reclaim the input tax on property) made sense when the property was to be used by the wedding business for its own taxable activities....although if the flat was rented as a flat the business was still partially exempt.

When the shop was then rented out, that is the change of intention that changes the historical VAT treatment. I doubt any advice was taken, because it rarely is. Everyone thinks reclaimed VAT is theirs to keep, not necessarily so when it comes to property and partial exemption.

They could reverse the rental invoices and repay the VAT back to the tenant, an option to tax is only valid if notified to HMRC, as they haven't notified HMRC then its technically not opted to tax which means the VAT charged on the rent is wrong and the tenant is technically reclaiming VAT they are not entitled to because they shouldn't have been charged VAT in the first a credit note could remedy that. It'd need to be documented carefully in the accounting records.

The flat - was it ever rented to a live-in tenant? If so, rent would have been exempt and there would be a requirement to perform a partial exemption calculation to see if the input tax reclaimed (on the property purchase, plus general overheads and maintenance costs) are recoverable in full or not each year.

You say the flat is now rented as part of the bar and now used as a kitchen, but unless you've changed the planning permission from residential to commercial or unless the lease agreement is clear on what is being rented, then it is still a flat/dwelling.
The lease will reveal the answer, if it is still a shop+flat in the lease, you can't charge VAT on the element relating to the flat because its still a flat you are renting, even if the tenant uses it as storage/cooking.

It's difficult to say whether the Accountant is right, they have access to all the details. The 4 years clearly relates to the timeframe for notifying errors/repayment of input tax previously reclaimed. Property cost about £85k and so not a capital item (10 years window), you say there is no formal option (20 years window), so we don't have to worry about the 10 or 20 year windows for reporting errors/adjustments, but we still have partial exemption adjustments based on change of use which would operate under the 4 year window, same as reporting errors/adjustments.

I would go back to the Accountant and ask them to explain why the 4 year rule is applicable, what part of the legislation are they looking at here.

This forum has limitations, hopefully you've got a good steer and can appreciate the scope of the issue, go speak with the accountant. If it were me, I'd be reluctant to deregister without knowing the full position. You don't know if VAT is owed to HMRC until the numbers are crunched and the correct legislation applied.

Thanks (2)
Replying to Jason Croke:
By mrme89
26th Jan 2022 11:16

Thank you so much for that. It's posts like yours that make AWeb a valuable resource.

Thanks (1)
Replying to Jason Croke:
By Bobbo
26th Jan 2022 13:18

Jason Croke wrote:

The flat - was it ever rented to a live-in tenant? If so, rent would have been exempt and there would be a requirement to perform a partial exemption calculation to see if the input tax reclaimed (on the property purchase, plus general overheads and maintenance costs) are recoverable in full or not each year.

As sale of residential property is VAT exempt, would've thought the total purchase price would have been apportioned between the flat and the shop with VAT only charged on the shop element. So the input VAT on the original purchase could be said as directly relating to the shop and not the flat, and so not impact the partial exemption.
Or is that not how it works?

Thanks (1)
Replying to Bobbo:
By Jason Croke
26th Jan 2022 14:01

You're right. Yes, you'd hope the VAT was only charged on the commercial/shop element - one of the details to check - but yes, in theory the input VAT on the shop is fully recoverable initially, but then if they rented the shop and charged VAT (but we're saying they didn't have an option and can't charge VAT), then the rent of the shop is exempt, and that is where you'd have partial exemption issue potentially.

Timewise, they reclaimed VAT in 2019, rented it in 2020, so if that is all within the same financial/partial exemption year then there is an adjustment for change of use....if the first partial exemption year ended 2020 and then the property was rented out as exempt, then potentially that is alright.

Back to the flat, any general overhead input tax, such as the solicitors fees, would be partially exempt input tax, even if they didn't rent the flat it isn't used for a business purpose and so would be disallowed anyway or if used for a business purpose of renting it out, then it's exempt, you could say the business uses the flat to stay over like a pub landlord but that has limitations and other non-VAT consequences......they may still be able to reclaim all their VAT if they are de minimis, but they'd not know that without doing the calculation first.

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