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.
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 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.”
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.
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.