VAT: Deregistration own goal
Businesses should check if output tax is payable on assets still owned on the date of deregistration. Neil Warren explains that ignoring this point can lead to high VAT assessments.
In the Slaymark case (TC7709) the partnership was issued with an assessment for £266,666 in respect of a commercial property it still owned on its date of deregistration.
Imagine the following situation: a husband and wife partnership owns a commercial property and has been charging VAT on rental income for many years. However, the annual rent is less than the VAT registration threshold of £85,000 and they ask you, as their accountant, to deregister them from VAT. The partnership has no other taxable income. Should you agree to their request?
Check correct threshold
The first key issue is that the relevant test for deregistration is not whether historical sales have been less than £85,000 in the last year. The relevant test is whether taxable sales in the next 12 months are expected to be less than the deregistration threshold of £83,000. If the answer is ‘yes’ then the partnership can deregister from a current or future date. But there is another question that must be considered.
Deemed supply of assets
If the partnership is charging VAT on rent, it must have opted to tax the property with HMRC in the past – ie all supplies connected with the property are standard rated. Does this mean that output tax must be declared on the final VAT return submitted by the partnership, based on the market value of the property still owned on the date of deregistration?
The answer to this question is ‘it depends’. If input tax was claimed when the property was purchased, then an output tax liability applies to the deemed supply on the final VAT return. If no input tax was claimed, then no output tax is due (VAT Notice 700/11, section 7)
The FTT case of Colin and Susan Slaymark had a number of twists and turns about their ownership of a commercial property in Eastbourne, including the deregistration scenario mentioned above.
They purchased the property in 2008, opted to tax and claimed input tax but then deregistered in April 2011. When they applied to deregister, they incorrectly stated that they had never opted to tax the property. HMRC noted that this statement was incorrect and that no output tax had been declared on the final VAT return for the property they still owned. HMRC issued a market-value assessment for £266,666 in February 2012.
VAT number reinstated
The own goal scored by the partnership was happily resolved because HMRC agreed to reinstate the VAT registration on 14 March 2012 because Mrs Slaymark advised, “I currently have two customers interested in the building, one for rent and one for sale.” The VAT assessment for £266,666 was withdrawn.
As it happened, the partnership did not generate any rental income between the purchase date in 2008 and the date it was sold for £1.5m plus VAT in October 2015. This created another problem.
Input tax disallowed
The partnership claimed input tax of £68,541 on many costs relevant to the building when it was sold in 2015. HMRC issued two assessments to disallow £64,446, only allowing claims on solicitor and estate agent fees that directly related to the final sale. The rest was disallowed because it did not relate to any business or economic activity – four tenants had occupied the property between 2008 and 2015 but had never paid or been liable to pay rent. The appeal against the assessment was dismissed.
It is important to learn from the mistake made by the Slaymarks back in 2011, which they were lucky to escape from because HMRC reinstated their VAT registration.
Output tax is due on all standard rated assets and stock still owned when an entity deregisters, if input tax was claimed when they were purchased. The exception is if output tax on the total market value of all stock and assets is less than £1,000; a de-minimis threshold that can be ignored.