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Where Taxpayers and Advisers Meet

VAT inspection rejected Input Tax

PropertyDev
Posts:4
Joined:Tue Jan 31, 2017 11:05 am
VAT inspection rejected Input Tax

Postby PropertyDev » Tue Jan 31, 2017 11:33 am

Could use a little advice please & thank you in advance of any assistance provided - i'll try to keep this as brief as possible.

A company (well actually a Trust) whose status is 'Partial Exemption' is refurbishing a building that is opted for tax, the building in question is a mixed use development - retail on bottom floor & student accommodation for the upper floors. Overseas Students have been found for the accommodation & the moving in date is set, however the contractor for the building incurred numerous delays completing the refurb & has runs over by about 8 weeks. This has a knock on effect with the students who arrive in the UK & have no accommodation ready for them.

The company arranges to temporarily accommodate them in a local hotel & will look for compensation from the contractor for these additional costs incurred once the development is completed. In the meantime the hotel bills the company for the 8 weeks accommodation & charges output tax. The company decides that as this bill is not directly for supplies on the building in question (i.e. actual works etc) that the input tax should be recoverable & does so.

Following a VAT nspection, the VAT inspector's opinion of this treatment differs & they reject the input tax claimed & impose a penalty on the company, with Potential Lost Revenue set at £60189. A fine of £9025.35 is imposed & none of this can be suspended apparently since this was not classified as a careless inaccuracy.

Can I seek some views on the treatment of this input tax please, is the VAT inspector correct?

spidersong
Posts:352
Joined:Wed Aug 06, 2008 4:05 pm

Re: VAT inspection rejected Input Tax

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.

spidersong
Posts:352
Joined:Wed Aug 06, 2008 4:05 pm

Re: VAT inspection rejected Input Tax

Postby spidersong » Tue Jan 31, 2017 5:24 pm

As an aside has the hotel charged VAT in full on the whole value of the stay?

When a stay in a hotel exceeds 28 consecutive days there is scope for the taxable consideration to be treated at a reduced value, so from day 29 instead of charging VAT on 100% of the charge there is scope that they may be able to only charge VAT on 20% of the bill (excluding meals, drinks, and services other than accommodation such as laundry). So even if the VAT must be suffered they may be able to get some of that VAT back from the hotel.

They may therefore want to look at HMRC's notice 709/3 'Hotels and Holiday Accommodation', particularly Section 3.

section 44
Posts:4467
Joined:Thu Oct 30, 2008 12:47 pm

Re: VAT inspection rejected Input Tax

Postby section 44 » Tue Jan 31, 2017 5:49 pm

presumably the upper floors weren't student accom/for residential use prior to the works

section 44
Posts:4467
Joined:Thu Oct 30, 2008 12:47 pm

Re: VAT inspection rejected Input Tax

Postby section 44 » Tue Jan 31, 2017 5:51 pm

since this was not classified as a careless inaccuracy
so HMRC are saying that it was deliberate. Can you expand/provide further context?

bd6759
Posts:4262
Joined:Sat Feb 01, 2014 3:26 pm

Re: VAT inspection rejected Input Tax

Postby bd6759 » Tue Jan 31, 2017 7:56 pm

since this was not classified as a careless inaccuracy
so HMRC are saying that it was deliberate. Can you expand/provide further context?
Unlikely, since the penalty is only 15% of the PLR.

What HMRC are probably saying is that they cannot suspend it because there is no defficiency in the record keeping, therefore no conditions that can be imposed to prevent a further inaccuracy occurring.

PropertyDev
Posts:4
Joined:Tue Jan 31, 2017 11:05 am

Re: VAT inspection rejected Input Tax

Postby PropertyDev » Wed Feb 01, 2017 8:14 am

Some interesting points raised - in response to some of these:-

1) Was not aware of the VAT on consecutive days for Hotel bills, most enlightening!
2) The property was offices prior to being converted to student accommodation, so in essence no student income has yet been achieved. Although I appreciate the point that the income that the expenditure links to will be the student income.
3) HMRC are not saying the error was deliberate hence the fine only being 15% as previously stated.

I was hoping to see if there was a way to persuade HMRC to suspend the penalties, but judging from your responses & HMRC's comments this wont seem likely.

Thank you for all the responses, very useful & appreciated!

section 44
Posts:4467
Joined:Thu Oct 30, 2008 12:47 pm

Re: VAT inspection rejected Input Tax

Postby section 44 » Wed Feb 01, 2017 10:04 am

Unlikely, since the penalty is only 15% of the PLR.
To the best of my knowledge penalties can only be issued for errors that are either careless or deliberate. I am not aware of Sch 24 FA 2007 providing for any other errors.
not classified as a careless inaccuracy
I interpret the above as meaning that the error was not careless. Do you interpret this differently or do you believe that penalties can be issued for errors that are something other than careless or deliberate - if so then what?

les35
Posts:635
Joined:Wed Aug 06, 2008 3:09 pm

Re: VAT inspection rejected Input Tax

Postby les35 » Wed Feb 01, 2017 3:14 pm

Whilst the responses are all helpful, you will always do better to have a specialist look at the actual correspondence, and your Returns.

Even so, a couple of comments:
Were the conversion works charged at 5%? If not, then you will need to have the Contractor re-invoice and refund.
There is some confusion over the penalty. A careless penalty can be suspended, but only if you are likely to engage in similar transactions in the future. Will you develop another building? If so, then ask for suspension.
If HMRC say the penalty is deliberate (and the majority they issue are), you should challenge this, and insist it is reduced to careless.

bd6759
Posts:4262
Joined:Sat Feb 01, 2014 3:26 pm

Re: VAT inspection rejected Input Tax

Postby bd6759 » Wed Feb 01, 2017 4:39 pm

Unlikely, since the penalty is only 15% of the PLR.
To the best of my knowledge penalties can only be issued for errors that are either careless or deliberate. I am not aware of Sch 24 FA 2007 providing for any other errors.
not classified as a careless inaccuracy
I interpret the above as meaning that the error was not careless. Do you interpret this differently or do you believe that penalties can be issued for errors that are something other than careless or deliberate - if so then what?
I'm saying that the OP did not explain it very very well. This must have been a careless inaccuracy, hence the 15% penalty.


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