Claiming input VAT on the construction of separate works
By Vaughn Chown
The recovery of input VAT incurred on purchases is often thought to be claimable without the need for detailed consideration. If HMRC later challenges the claim and disallows the repayment, this can cause significant difficulties for both client and adviser.
The question becomes particularly acute when considering scenarios such as the construction of structures separately from the main works. For example, when a developer pays for a band stand, memorial, clock tower, bridge, or any structure which is not part of the commercial or residential properties being developed, can the input VAT on costs be recovered?
This issue is exemplified in the case of Folkestone Harbour (GP) Ltd v HM Revenue & Customs  UKFTT 101 (TC). The taxpayer had planned to develop Folkestone and constructed a fountain to mark a kind of entrance to the new development. They claimed input VAT on the costs of the works accordingly.
HMRC rejected the taxpayer’s claim, saying they “cannot identify a nexus between the expenditure on the fountain and the planned redevelopment of the harbour” and “did not believe that the fountain, which does not lie within the potential harbour redevelopment, has an obvious business purpose”. There were various arguments, such as who would benefit from the fountain, whether it would attract any further interest from investors, the unusual location of the fountain away from the redevelopment and the importance of separate planning permission for the fountain and the redevelopment project.
Despite strong arguments from HMRC, the Tribunal found that the fountain was for a business purpose and the taxpayer’s claim was allowed.
The case shows that input VAT claims cannot be taken for granted. It is important to be able to justify the claim, tracing a connection between the expenditure and either specific taxable income or the overall business purpose. HMRC have shown that they will challenge such connections where there is doubt and the claim should therefore be considered carefully.
Published July 2015