Postby spidersong » Tue Jan 31, 2017 5:18 pm
Input Tax is recoverable so far as it relates to the making of taxable supplies, so what you have to look at is what income does the expenditure have the most direct and immediate link to.
They have incurred the cost in relation to the Student Accommodation that they provide, that accommodation is a VAT exempt supply, the Input Tax is not deminimis, it was therefore not recoverable. The fact that the expenditure was not on the actual building they use isn't really a relevant consideration, the question is always which of their supplies the expenditure relates to and it is indeed difficult to see what taxable supply the company might have thought the cost was attributable to!
Obviously I don't know the capabilities and situation of those operating the company and preparing the returns but since there seems no potential taxable supply for them to hang recovery on it isn't that much of a reach for HMRC to see it as a deliberate overclaim to ameliorate their losses due to the overrun works. They need to convince them that this is an innocent misunderstanding of how VAT and partial exemption work and that they genuinely did believe that the VAT was claimable, how easy this is will depend on their experience in the field and how long they've been trading.
Even if convinced that the overclaim was not a deliberate error, I can't see them dropping penalties altogether as not taking proper advice and not reading the rules properly tend to indicate a degree of carelessness as based on what's said the irrecoverability of the cost seems a fairly straightforward conclusion.