Reclaiming Input VAT on legal costs in land transfer

[arunakb]

I am an active farmer and VAT registered. I recently purchased additional agricultural land which I shall be farming. I incurred legal costs which included the standard rate of VAT in the transfer. I wish to reclaim the VAT on the legal costs. My account asserts that I will have to wait until I sell the land and reclaim the VAT as part of any capital gains tax I may be liable to. I do not intend to sell the land. I struggle to understand why I cannot reclaim the input VAT now. Has anyone have any views on this and in particular able to cite any legal precedent or HMRC VAT Notice to support my belief that I can reclaim the VAT now?

[pawncob]

https://www.taxationweb.co.uk/tax-articles/vat-a-excise-duties/claiming-the-vat-back-on-legal-costs.html

[Trevor S]

I am assuming that the land was purchased and is owned by your VAT registered business, rather than you personally. Therefore where I refer to "you" below, I mean your VAT registered business.

Are they "your" legal costs (i.e. a charge for the services of a solicitor who you have instructed), or are you reimbursing another party's legal costs (e.g. the seller's costs)?

If it is the latter, then you cannot recover the VAT, as you haven't received the supply of the legal services. The other party might have been entitled to recover the VAT if they were VAT registered and had put the legal services to a taxable business activity. However, if the services related to a (presumably) VAT-exempt supply of the land to you, they could not reclaim the VAT themselves either, and so needed to include that irrecoverable VAT in their recharge to you.

This might then explain the Capital Gains Tax comment. CGT isn't an area that I have any knowledge of, but I suppose that the irrecoverable VAT might be seen as part of the cost of your purchase? I can't otherwise see any link between the VAT and any potential future CGT. But I really don't know enough about CGT to give any opinion on this.

However, if they are your legal costs, do you use the "flat rate scheme"? The reason for asking is that under such schemes, you account for a lower rate of VAT on your sales - but in turn are unable to recover VAT on purchases.

If neither of these are the case, then I'd suggest you ask your accountant to explain their reasoning? Ultimately, businesses are responsible for their own VAT position, even if they rely on someone else to complete returns, etc.. So it's important that you understand the reason for the VAT treatment being applied.