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VAT Voice by Andrew Needham

Andrew Needham, Director of VAT Solutions (UK) Ltd, asks whether an aspect of Customs’ policy regarding the option to tax is ‘fair and reasonable’.It has become increasingly obvious over the last few years that if Customs do not like something, for whatever reason, they will simply change the rules without taking any notice of what the law actually says, and then wait until somebody challenges them in the VAT Tribunal. By doing this, they normally ‘get away with it’ for two or three years before being made to stick to the law. There have been a number of examples in the past few years, but the most recent that has come to our notice involves the option to tax commercial properties.

A lot of the VAT legislation allows for apportionment methods to be used in the recovery of input VAT, but does not actually lay down any specific methods. They just have to be “fair and reasonable”.

Option to tax

When a business decides that it wants to ‘opt to tax’ a building (i.e. charge VAT on the rent or sale) it is then able to recover the VAT on any related costs. If it has already charged VAT exempt rents on the property, but wants to recover VAT previously incurred, for example on the purchase of the building or a recent renovation or reconstruction, it has to obtain permission from the Customs and propose a method of recovery. This only has to be a ‘fair and reasonable’ method. There is nothing in the legislation that specifies what method should be used. The legislation is contained in para 3(9)(c) of Schedule 10 of the VAT Act 1994, and states:

(c) ‘the total amount of input tax which has been incurred on or after 1st August 1989 or is likely to be incurred in relation to the relevant land,

that there would be secured a fair and reasonable attribution of the input tax mentioned in paragraph (c) above to grants in relation to the relevant land which, if the election were to have effect, would be taxable.’

Once an option to tax has been exercised, it cannot be revoked for at least twenty years. So, for example, if a business bought a commercial building for £200,000 plus VAT of £35,000 two years ago, and has rented it out for two years before opting to tax it, a fair and reasonable method would be take 18/20ths of the VAT as relating to the remainder of the 20 years that will be subject to VAT, and reclaim it (thereby capping the VAT loss at 20%). All seems fair and reasonable, and is supported by a High Court decision (Curtis Henderson v CCE).

Fair and reasonable?

‘Ah, no’ say Customs – ‘it is now our policy to use an adjustment period of ten years, same as the Capital Goods Scheme (even though this is not a capital item)’. So you point out that the legislation only says that it has to be ‘fair and reasonable’ and makes no mention of a maximum ten year adjustment period. ‘Well’, reply Customs, ‘that’s our policy, and if you don’t like it, appeal to the Tribunal.’

In this example, Customs would reduce the amount of VAT you could reclaim from £35,000 x 18/20 = £31,500 to £35,000 x 8/10 = £28,000. This means that you would have lost £3,500 on the whim of Customs.

In these types of circumstances, where Customs ignore the legislation and makes up their own rules, we would advise that you take them on and appeal to the VAT Tribunal. The Tribunals usually follow the legislation, and ignore rules made up by Customs with no legal basis. Of course, we would be delighted to represent any parties interested in taking Customs on!

February 2005

Andrew Needham
Director, VAT Solutions (UK) Ltd
Email: andrewneedham@vatsolutions-uk.com


VAT Solutions (UK) Ltd
11 Winmarleigh Street,
Warrington,
WA1 1NB

(T) 01925 242497
(F) 01925 242498
(M) 07810 433927
(W) www.vatsolutions-uk.com

VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via the following address: www.vatsolutions-uk.com/newsletter.doc