HMRC right to disallow input tax on expenses linked to land sale
Neil Warren considers a recent tribunal case where the taxpayer’s claim for input tax on expenses linked to land sale failed on a number of points, and reminds advisers that it is important to discuss the VAT issues of any property project at the planning stage.
I sometimes start reading a tribunal case and say the words “appeal dismissed” after about two sentences. It can be immediately obvious that the taxpayer has totally misjudged the VAT rules and headed down a road that has no exit. An example of this was the case of Honeygarth Ltd (TC06741) about input tax claimed by a company in relation to a sale of building land.
The directors of the company (Mr and Mrs Watson) jointly owned a plot of land and had tried for nearly ten years to get funding and permission to build houses on the land.
They formed Honeygarth Ltd, which registered for VAT in 2015 and the company submitted a repayment return for £5,091 for the August period. HMRC disallowed £1,771 as being relevant to an exempt supply of land and issued a further assessment for £3,049 in respect of purchase invoices addressed personally to and paid for by the directors. Some of the expenses were also relevant to private expenses and the invoices were not sufficient in other cases.
The directors claimed that building work had actually started on the land, so the sale of the land firstly by them personally to Honeygarth and then subsequently by Honeygarth to a developer should be zero-rated as the sale of partly constructed dwellings. This would mean that Honeygarth could then claim input tax on related expenses.
But the factual reality was that no building work had started above ground level, so the deal was an exempt sale of land. Furthermore, exchange of contracts and completion of the deals happened simultaneously so Honeygarth supposedly owned the land for “a split second of time.”
The reality was that the land had been sold by the individuals to the developer. The director acknowledged that “no documents had been provided which showed Honeygarth as the vendor of the land to the developer.”
The tribunal asked the very basic question: Did Honeygarth ever have any interest in the land in order to make a supply? The answer was no, which meant that any subsequent analysis of whether the supply was taxable or exempt and if the conditions for claiming input tax had been met were irrelevant.
To complete the loop, even if Honeygarth did have an interest in the land (albeit for a split second) the tribunal also agreed with HMRC that no building work had actually started, so there was no scope for zero-rating either.
Many advisers acting for housing associations and other developers will be aware of the phrase ‘golden brick’ and its VAT relevance. It basically means that a new residential development must have at least one course of bricks constructed above foundation level to be classed as a zero-rated sale of a partly completed residential dwelling rather than an exempt land sale (see VAT Construction Manual – VCONST03540).
This case is a classic example of business owners creating a VAT muddle that was destined to fail. With any property project, it is important to discuss the VAT issues at the planning stage, not after the horse has bolted about twenty miles from its stable.
Even if the company had made a zero-rated sale of a partly completed residential development (which it didn’t), the input tax would almost have certainly been disallowed on the basis that the supplies were made privately to the directors. To misquote the Frank Sinatra song, the director decided to do things “My Way” but and came unstuck in a big way.