VAT on property leased to sibling

[rossmcv]

Hi there

a query has come up and im not sure how best to handle it...

A client owns a pub outright under a ltd company which was registered for VAT at the time. The pub was closed when purchased and he couldnt get anyone to take on the lease so he leased it rent free to his sisters ltd company. at the time we confirmed this with HMRC when they enquired into the status of the business and they were supposedly happy that no vatable transaction was taking place (unfortunately this part is 2nd hand info of which im not entirely convinced about, was before my time in the company)

last yr HMRC conducted a full inquiry into the business and decided that their was a vatable supply and they assessed an amount of £45k in unpaid VAT.

can we retrospectively charge his sister a nominal amount of say £1000pm for 3 years and pay the VAT on that?? or are they wanting VAT on full market value for a pub in that area??

any help would be gratefully received.

Regards

Rossmcv

[spidersong]

I think you need to give more info, for instance why do HMRC feel that the letting of property is now a taxable supply?

Do we assume that an option to tax is in place? (under schedule 10 of the VAT Act 1994) since property rental is by default exempt

What are the basing their figures on? This would represent rental income of over £70K a year, this is for many pubs at least a third of their turnover. A third of turnover in rent doesn't leave much room left for wages, purchases, overheads, and profit.

Are they instead saying the sisters company is acting as agent of the brother in running the pub rather that principle?

What does the client get out of the deal, your query basically states that he owns a pub but derives no income from it at all as he leases it rent free? What sort of a business man does that, I assume the deal is somewhat different to just 'he leases a pub rent free'

What are they assessing; undeclared output tax, disallowing input tax, a mix?

If he's not receiving any rent then HMRC have nothing to assess. They can only do 'market value' when they issue a direction under schedule 6 in relation to supplies where money is received from a connected party, if this is rent free then no consideration equals no power to assess for output tax.

Basically the question as set says HMRC wish to assess for tax on an exempt supply for which no consideration exists i.e 'HMRC are acting totally illegally, can we do anything about it?' I suspect this is not the case! VAT is heavily detail based, and this doesn't give enough detail, or the detail is focused on the wrong areas.

If they've issued a direction under schedule 6 then market value is the only option they're going for, issuing invoices now won't affect it. And if they're assessing under something else, then issuing invoices now probably won't have much of an effect.

Have they quoted any legislation to support the assessment? That'd give the best clue as to what this is and what to do about it.