The questions most frequently asked on the VAT advice line relate to property. Although VAT in relation to property can be complex, the situation can be far worse when a change in circumstances or a transaction has already taken place and the client hasn’t taken advice at the right time or their accountant hasn’t realised the implications. In this series of short articles, we aim to draw attention to some of the common areas of risk so that hopefully it won’t be you or your client having to deal with the fall-out in the future.
In this article we look at:
Pre-registration input tax on land and buildings
Most accountants and businesses are familiar with the concept of claiming pre-registration input tax, and prior to January 2011 land and buildings were treated in the same way as other goods irrespective of their cost.
However, where VAT registration was applied for on or after 1 January 2011, the entitlement to claim VAT incurred prior to the date of registration excludes VAT on assets falling within the capital goods scheme (CGS) (VAT regulations 1995: reg. 111(2)(e)). The CGS applies to land and buildings costing £250,000 or more + VAT, and the new CGS rules apply as the only way to recover the input tax. HMRC set these out, including a worked example, in section 13 of Notice 706/2.
If the business has made exempt supplies of the property prior to registering, complete years of exempt use that have elapsed between first use and registration are deducted from the ten year term of the CGS, so that the business would claim one tenth per year but over a reduced number of years (Regulation 114(3D)).
As the VAT incurred prior to registration is initially non-deductible the baseline recovery for the CGS is nil. Assuming that use following registration is fully taxable, 100% of 10% is then claimed at the end of each remaining interval.
If the business has made no use of the property prior to registering, and assuming fully taxable use following registration, again 10% is then claimable at the end of each of ten annual intervals (Regulation 114(4))
So it should now be apparent that while the business will eventually get either full or partial input tax recovery, the effect of this legislation on cash-flow is significant. When you discuss registration with a client it is always worth asking about VAT they have already incurred or are about to incur, to see if any of the assets would be caught by the CGS. Then you can explore, with the assistance of the VAT Advice Line team if necessary, whether it is preferable and possible to backdate the registration.