Accountants shocked by input VAT horror showby
Neil Warren reports on a tribunal case where an accountancy firm challenged HMRC input tax assessments for more than £63,000.
Imagine that your business has incurred legal fees and the invoice from the solicitor has just arrived, saying simply: “Legal fees as agreed - £73,333 + £14,667 VAT”. Can you claim input tax on this invoice?
The starting point is to consider the legislation about what must be included on a valid tax invoice – as listed in Reg 14, VAT Regulations 1995. The list is extensive – and para (g) states that it must include “a description sufficient to identify the goods or services supplied.”
In the case of Knightsbridge Accountants Ltd (TC8026), HMRC decided that the above description was insufficient to prove that the fees related to the business and taxable activities of KAL. The officer raised an assessment using her best judgment to disallow input tax of £14,667. The tribunal agreed with HMRC.
The invoice for legal fees was the side show in this fascinating case. HMRC also disallowed input tax of £44,000 on the purchase of a property for £240,000 plus VAT that KAL used for its taxable business as a firm of accountants.
The invoice was made out to KAL and the seller had charged VAT because it had opted to tax the property. And accountancy is a fully taxable business, with no input tax restrictions for partial exemption. So, what is the problem, you might ask? The answer is “a big one” - read on
Property owned by a separate company
The property was not owned by KAL. It was owned by a separate company, Knightsbridge Holdings Ltd (KHL). This was confirmed by a land registry search. HMRC also confirmed that the accounts filed at Companies House for KAL did not show any fixed asset additions in the year ended 31 August 2017 – the property was purchased in April 2017.
HMRC therefore disallowed input tax on the basis that there had been no supply of goods to KAL – only to KHL, and the latter was not registered for VAT. The fact that the invoice was made out to KAL was irrelevant.
The taxpayer’s argument was that KAL had a beneficial interest in the property and was therefore entitled to claim input tax on the purchase price. The holding company arrangement was apparently insisted on by the bank as a condition of the mortgage. These arguments were irrelevant and the appeal failed – a business can’t claim input tax on goods it does not own.
It is disappointing that the directors did not structure the VAT arrangements differently, which would have saved £44,000:
- KHL registers for VAT and makes an option to tax election on the building – form VAT1614A is submitted to HMRC
- It receives a tax invoice correctly made out to the company when the building is purchased and claims input tax on its first VAT return
- It charges a commercial rent to KAL plus VAT as a result of the option to tax election
- There are no anti-avoidance issues with associated business rules because KAL is a fully taxable business and the purchase price is less than the capital goods scheme threshold of £250,000, which is when anti-avoidance issues are relevant.
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