Vat Exempt Client looking to recover the VAT on a VATable Building Purchase.

Vat Exempt Client looking to recover the VAT on...

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This is my first question to this group, so I hope it's a welcome one!

I have a potential new client who runs a childcare nursery as a Ltd co. They current lease the building they occupy and are seeking to buy.

Childcare fees are exempt from VAT, but the owner/seller of the building is VAT registered and will be including VAT on the value of the sale.

The cost of the building plus VAT is not viable for the nursery. The cost of the building without VAT is viable.

The Directors of the VAT exempt nursery have set up a Limited Liability Partnership that they aim to register for VAT so they can reclaim the VAT on the purchase. They will pass the VAT onto their nursery eventually - but over a period of years rather than in one hit.The Directors/Partners are a married couple, the Ltd co has one additional Director.

Is this ok, or as I suspect does this fall foul of Notice 742A where HMRC would consider this to be an avoidance scheme as the directors of the nursery are the partners of the LLP. 

The Directors will purchase and modify similar buildings in the future but lease these out to other nurseries that are not related, which I understand is fine according to Notice 742A.

I have had 2 or 3 conversations with HMRC about the recovery of VAT on the property through the LLP before they can start subletting to the Ltd Co, but not once did they mention the anti-avoidance tests to be considered relating to Notice 42A. Which is slightly scary! 

I would be interested to see if anyone has found a solution to this issue or if perhaps I have misunderstood the VAT notice.

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By shaun king
06th Sep 2012 20:21

Your reading of Notice 742A is correct as from your explanation the option to tax from the LLP will be disallowed thereby meaning the LLP cannot recover the VAT. With the drafting of the anti avoidance provisions your client will find it virtually impossible to recover the VAT charged under their proposed business structure 

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