Q&A: paying VAT on a garden office construction

In our regular VAT Q&A series, Sally Atkins, VAT advice consultant at Croner Taxwise, examines the underlying principles of whether VAT can be reclaimed on construction of a garden office, bearing in mind the strict rules on business use only

Q. My client is the director of an interior design company. The company rents a small unit for storing stock, but this space is not really suitable for use as an office. They are exploring the possibility of having a home-office erected in their garden. What is the VAT recoverability of such a project?

A. Although each case must be judged on its own merits, there are a number of common principles, which give an indication regarding VAT recovery.

Section 24(1) VAT Act 1994 (VATA 1994) defines input tax as VAT on the supply to a taxable person of ‘goods or services used or to be used for the purpose of any business carried on or to be carried on by him’.

HMRC’s Internal Manual VIT11500 states ‘if VAT is incurred wholly or partly for other purposes then it can only be input tax to the extent that it is incurred for business purposes’.

As such, two fundamental principles to bear in mind are that the supply in question must be made to the business, and for the purpose of that business.

In the case of the director of a limited company it is recommended that the company both contract for and directly pay for the expenditure, rather than the director claiming it as an expense or via an adjustment to the director’s loan account.

The latter two options do not necessarily preclude recovery, but the first option is indisputably a company cost.

The question of business purpose can be problematic for expenditure incurred on works to or within the environs of the private residences of company officers or business owners such as sole proprietors.

There is no guarantee that HMRC will not enquire into the usage of the property and if there is expected to be private use, however minimal, then an appropriate apportionment should be made on a fair and reasonable basis.

For a fully taxable business, whether the VAT is incurred on goods or services can often be a moot point. However, if the business is on the flat-rate scheme, do not assume, if the total expenditure is over £2,000, that the VAT can be recovered under the capital expenditure goods rules.

Building services and the materials subsumed therein are not goods for VAT purposes. It may be possible to argue that the purchase of a complete lodge/structure, which needs siting, can be goods, but advice should be sought before any claim is made.

As a final point, questions often arise regarding change of use. HMRC’s internal manual on Input Tax (VIT25700) provides clarity on change of use where building costs have been incurred.

Prior to 2011 if a change of use from business to non-business occurred within 10 years of the input tax having been incurred, the Supply of Services Order 1993 ( SI 1993/1507 as amended) required an adjustment to be made.

Since 1 January 2011, this has only been necessary where the value of the expenditure has been within the capital goods scheme; that is a VAT exclusive value of £250,000 or more. It should be noted that the order does not apply if there has been a previous apportionment to reflect any non-business or private use.

In this instance described above, provided the company contracts for and pays for the work, the VAT is recoverable to the extent it is to be used for the purpose of the business.

About the author

Sally Atkins is a VAT advice consultant at Croner Taxwise. Sally is the leader of the VAT advice and consultancy team at Croner Taxwise. She has worked in VAT since 1990, including eight years spent with HMRC, both as an assurance and enquiries officer involved in presenting seminars and business education. Since joining private practice in 1999, Sally has specialised in providing VAT technical advice to a variety of clients, ranging from small one-man bands to large multi-national corporations, on the full range of VAT technical matters.

This article originally appeared in Croner Taxwise VAT Tax Question of the Week

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