VAT & property: A Few Good Horror Stories: No good property section would be complete without a few good horror stories showing what happens when things go horribly wrong! So sit back and think “that could have been me”!
- Property portfolios
A large manufacturing group had a property portfolio of over 50 properties which was worth nearly £20Om. The portfolio included both commercial and domestic properties, some old and some new. Their main business was fully taxable and but the property portfolio meant that the group was partly exempt due to exempt rental income and occasional exempt property sales.
The group’s FD and management accountant did their best to deal with all of the VAT issues. But things had to change after the group received an assessment for over £lm VAT because of an error on one particular transaction. They invested in a bespoke VAT manual which covered the group’s particular property issues and a helpline service to avoid future problems. The group has not received any major property related assessment since then and FD believes that the cost of the manual and helpline is money well spent.
- One-off property transactions
Even smaller businesses with one-off property transactions can find themselves caught. A fully
taxable design company purchased a new property for just ‘over £lm plus VAT of £180,000.
After a year, they let half the property without opting to tax but failed to make any of the
required adjustments under the capital goods scheme. Three years later, their new auditors
noticed the problem and estimated that the company owed approximately £30,000 to HMRC.
They recommended an immediate voluntary disclosure to the VAT office, but asked their
inhouse VAT consultant to review the figures before the disclosure was sent to HMRC. The
VAT consultant reviewed the auditors’ calculation and reached agreement with the VAT office which reduced the underdeclaration by more than half.
- TOGCs and Option to Tax notifications
Another regular problem concerns the VAT treatment of sales of property rental businesses where the vendor has opted to tax the property concerned. These sales can be treated as transfers of going concerns and thus free from VAT but only if the purchaser also opts to tax the property and notifies HMRC by certain strict deadlines. Otherwise the transaction is a taxable supply and VAT must be charged on the full selling price. This means that the purchaser has to bear the additional funding cost of the VAT, even though they may subsequently be able to claim all of the VAT back on their VAT return.
But it also adds a further real cost to the cost of the transaction in the form of additional Stamp Duty Land Tax.
This tax is normally payable on the VAT inclusive value of property sales and leases. If the transaction isn’t the transfer of a going concern then Stamp Duty Land Tax is levied on the additional VAT cost and can’t be reclaimed.
And finally, a very fortunate mistake by a VAT officer saved one business a lot of money!
The client (call it Company A) was a fully taxable service company. It received an assessment for around £140,000 VAT which was incurred on the construction of a new building. The building was a warehouse and was leased to a third party.
The client had failed to opt to tax the property and HMRC issued the assessment on the basis that the property was being used to make exempt supplies.
In fact, the assessment had actually been issued to the wrong company as it was another group company, Company B which actually owned the frfeehold of the property and the lessee. It had also borne the building costs and all of the invoices were issued to it, not Company A.
The assessment was completely withdrawn even though Company B had not opted to tax the property at the correct time. And because of a number of other factors, HMRC could not assess Company B for any of the input tax concerned so neither company suffered any loss of input tax.
The FD had not spotted that the assessment was issued to the wrong company and it was only the detailed review of the assessment by the consultant that brought this factor to light.
The potential VAT cost was about fourteen times more than the cost of the consultant. Also, the company was able to recover a proportion of the consultant’s costs from HMRC because the assessment had been issued in error. The rest of it was money well spent on getting them out of a potentially costly situation.
More horror stories are available on request!