Independent VAT Consultant
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VAT charged in error can’t be reclaimed

A property company incorrectly paid VAT of £63,000 on the purchase of some flats and attempted to reclaim the input tax. Neil Warren has questions for the advisers on this transaction.

18th Feb 2021
Independent VAT Consultant
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Wood miniature colorful houses on wooden table and green background. Mortgage, real estate, insurance concept.

It is common knowledge in the tax profession that VAT is never charged on the sale of a residential property (a ‘dwelling’). 

The sale of such a property will either be zero-rated as a new build from bare land, or it will be exempt from VAT if it is an existing dwelling. But the key point is that the transaction is never standard rated, even if the seller has opted to tax the site in question. 

An option to tax election is overridden in relation to supplies of residential property (see VAT Notice 742A, section 3.) 

The case

The directors of Kang and Mand Ltd (TC07945) purchased a residential property in Wolverhampton for £315,000 plus VAT of £63,000 in July 2016. The building used to be a public house but only consisted of residential flats at the time of the deal. 

Input tax of £63,627 was claimed on the company’s September 2016 return. The other £627 related to VAT paid on legal fees connected to the purchase. HMRC raised an assessment to disallow the full amount claimed, including the legal fees.

Incorrectly charged VAT 

The first key point is that input tax can only be claimed if VAT has been correctly charged in the first place. The fact that a customer has paid VAT and received a correct tax invoice from a supplier is irrelevant. The solution is to go back to the supplier and ask for a VAT credit and not claim it on a VAT return.

It is worth reading the VAT Input Tax Manual VIT12500 on the basics of input tax, including the key sentence for the Kang case: “Tax charged wrongly on a supply which is outside the scope, exempt or zero-rated is not input tax.”

Tax invoice

To continue the horror story, another weakness was that the company did not hold a proper tax invoice to support the input tax claimed on the flats - this was very strange. 

However, all is not necessarily lost because HMRC has the power to accept alternative evidence to support an input tax claim in the absence of a tax invoice (see VAT Regulations 1995, SI 1995/2518, Reg 29(2)). The evidence must clearly that show that VAT has been paid on a taxable supply of goods or services to a VAT registered supplier that is for the purpose of its business. 

For HMRC’s interpretation of the legislation, and the alternative evidence it will accept, see VAT Input Tax Manual VIT31200.

Exempt activities

In cricketing terms, the taxpayer is definitely on the back foot. But to complete a hattrick of woes, the purchase of the flats related to exempt activities of the company, either renting them out or selling them on. This is why HMRC also disallowed £627 input tax on the legal fees linked to the deal, under the rules of partial exemption. 

Taxpayer sees the light

At the hearing, on 17 February 2020, the taxpayer’s accountant accepted that the VAT had been incorrectly charged by the seller and the hearing was therefore adjourned until 29 May and subsequently to 16 June, so that the taxpayers could ask the seller for a VAT credit. Nothing further was heard from the taxpayer or the company’s accountant, so the judge dismissed the appeal on 17 November. It is assumed that the VAT credit was forthcoming.

Questions for the advisers

How did the solicitors dealing with the transaction in 2016 decide that VAT should be charged on the sale of residential dwellings? 

Why didn’t the company’s advisers ask the seller for a VAT credit straight away? 

The HMRC assessment was clearly correct. 

The tribunal case report was only four pages long: it must have been one of the easiest decisions made by Judge Michael Connell in his long and distinguished career.

Replies (15)

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By frankfx
18th Feb 2021 18:31

I wonder if the parties concerned would respond to a professional curiosity letter from NW?

If only to explain how the errors occurred.

Not to point fingers.

Zero due diligence?
By several parties.

How senior or expert were those involved?

Or was there complete ignorance of the VAT implications.

HMRC should not be blameless ,

" VAT is a simple tax "

should not be their defence.

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Replying to frankfx:
By stepurhan
19th Feb 2021 08:13

frankfx wrote:

" VAT is a simple tax "

should not be their defence.

Mainly because, as most accountants are aware, it would be a bald-faced lie.
Thanks (2)
Replying to frankfx:
By Duggimon
19th Feb 2021 09:48

In this instance, HMRC are blameless.

"There is never VAT charged on residential properties" is as simple a tax rule as there could be. "You can't claim back VAT you shouldn't have been charged" is slightly more complex but still within the understanding of children.

HMRC were 100% correct to disallow and I hope the idiots taking this to tribunal were charged for wasting everyone's time.

Thanks (3)
Replying to frankfx:
Jason Croke
By Jason Croke
19th Feb 2021 10:33

Doubt any professional advice was taken in this transaction. Often the logic is "I'm VAT registered therefore I can reclaim VAT", the thought of whether VAT is correctly charged or not, the concept of partial exemption and even the basics of VAT law, is not even on the radar.

VAT is as simple a tax as any other tax. It's only complicated when you think you know. Much like Corporation Tax or Capital Gains Tax, easy enough once you get your head around them, but its not something a novice can do, even with viewing the guidance or asking questions on AccountingWeb and is why often the responses here are "seek proper advice".

Neil's article is good and reminds us all that you can't just reclaim or charge VAT "to be on the safe side", there is no safe side, you establish the VAT treatment of the supply and purchase being made every time and if in doubt, check.

Thanks (4)
By johnjenkins
19th Feb 2021 09:51

As VAT is not a tax on business, merely Joe public, surely HMRC, if they have received the money, has to give it back via whichever way suits the legality.
This is why I have always advocated that money should never change hands between legally vat registered business.

Thanks (2)
Replying to johnjenkins:
By Ammie
19th Feb 2021 10:25

Agreed, John.

Unfortunately, HMRC are not in the business of such a reasonable suggestion and to keeping compliance straight forward and clear. The entanglement of decades of legislative changes make tax a minefield, even for those in the know, as interpretation is not always easy.

The cynic in me can't help but think that catching out the taxpayer is intended in some instances.

Thanks (3)
Replying to johnjenkins:
By North East Accountant
19th Feb 2021 10:31

I agree that VAT should only be charged to the end punter and stop all the nonsense like this, DRC, etc

Thanks (0)
Replying to johnjenkins:
By tanyajackson
19th Feb 2021 10:31

Absolutely. What a total waste of everyone's time and money. If the supplier charged it, collected it and paid it over to HMRC, why on earth didn't HMRC just offset. No loss, no gain. A small penalty perhaps for stupidity.

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Replying to tanyajackson:
By Nick Graves
19th Feb 2021 12:20

Something resembling a straightforward Purchase Tax would eliminate so many non-Value Added jobs for the boys, it would never fly.

IME, many solicitors wouldn't know a VAT1614 from a Ford D1614 (dinosaur!) so no surprise there. But really someone somewhere ought to have asked a beancounter about the partial exemption rules - former pubs can be a right minefield, dependent upon how they're chopped up.

That's only really the inputs, and not the outputs.

It's all a bit baffling. The VAT rules AND this transaction...

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By Malcolm McFarlin
19th Feb 2021 10:44

Might there be penalties to follow as the tribunal matter has now been resolved?

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By fawltybasil2575
19th Feb 2021 12:04

I note the penultimate paragraph of the Judgment, ie:-

“25. Nothing further has been heard from the Appellant or its representatives” (ie since the previous hearing on 2 June 2020).

One assumes that, as Neil has also assumed, the purported “VAT” has since been recovered from the vendor.

One has to ask why, many months after the FTT hearing on 2 June 2020 , the FTT (and presumably also HMRC) were not advised (by the Appellant or their representatives) that the Appeal had been withdrawn, Judgment having been released on 17 November 2020.

The purchaser's solicitors would surely have been aware of the nature of the premises (even if they were misinformed by the purchaser of that nature; or misunderstood what the purchaser had told them) during its enquiries/searches processes; and therefore known that VAT was not chargeable.

Perhaps the vendor has not yet refunded the purchaser after all.

Some "more than meets the eye" factors may be in play here ! The Appellant company's Financial Statements are currently overdue at Companies House.


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By Ian McTernan CTA
19th Feb 2021 13:29

This highlights one issue in particular: non experts who think they know the rules and then make big mistakes.

I'm not a VAT expert, so I keep one handy so I can refer questions to them.

VAT on residential property would have rung alarm bells for me- so perhaps the description of what was being sold was incorrect and the advisers assumed it was a pub. There is the real issue: assumption.

VAT and property usually involves massive figures which you do not want to get wrong, so always double check and my strong advice if you're not a VAT expert is to get their advice. Clients are generally very happy to pay for it to give them certainty.

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By Paul Crowley
19th Feb 2021 14:15

'Taxpayer sees the light
At the hearing, on 17 February 2020, the taxpayer’s accountant accepted that the VAT had been incorrectly charged by the seller and the hearing was therefore adjourned until 29 May and subsequently to 16 June, so that the taxpayers could ask the seller for a VAT credit. Nothing further was heard from the taxpayer or the company’s accountant, so the judge dismissed the appeal on 17 November. It is assumed that the VAT credit was forthcoming.'

Accountant? Was this really the bookkeeper?
Sounds like DIY accounts

Really just a recognition that DIY can cost a bit more than a damaged thumb nail

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By AndrewV12
23rd Feb 2021 08:09

Don't forget (as I understand it) Vat was only introduced when we joined the EEC, and it was only 5%, as we know its 20%, so mistakes will be charged at 20% not the original 5%, it makes a lot of difference.

The tax has turned into a monster.

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Replying to AndrewV12:
By johnjenkins
23rd Feb 2021 09:41

It's all to do with "How can we increase the take".

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