Q&A: VAT on property and anti-avoidance

In our regular Q&A series from Croner Taxwise, we consider whether VAT can be reclaimed when a company sub-lets a property to a non-VAT registered business bearing in mid the relevant anti-avoidance rules under VAT 1994

Q. My client has a limited company that runs a children’s day nursery. It is not VAT registered because all of its supplies are exempt. The business is expanding and the owners are looking at purchasing a larger property – the property they have identified has an option to tax (election to waive exemption), and the total purchase price is £300,000 plus VAT.

As the nursery cannot VAT register, the director is looking to set up a new company to purchase the property.  It is the intention that this company will then opt to tax the property and rent it to the associated nursery company.

 As they will be making a taxable supply by charging VAT on the rents, I assume the new company will be able to reclaim the VAT charged on property purchase?

A. As a basic principle of VAT, businesses have the right to deduct input tax where the VAT incurred is intended to be used in making taxable supplies.  

From this, you would expect to conclude that, as the property company will opt to tax the building and make taxable use of it, it should be able to recover the input tax on the purchase.

However, Value Added Tax Act 1994 (VATA 1994), Sch 10, paras 12–17 contain the anti-avoidance provisions that dis-apply the option to tax, under the following conditions:

  • the land or property is a capital item for the purposes of the Capital Goods Scheme, ie, the purchase was for £250k or more (exclusive of VAT);
  • the land or property is supplied to an associated/connected party;
  • the associated/connected party does not intend to use the property to make wholly, or substantially-wholly taxable supplies (substantially wholly meaning 80%).

As all of the above apply in this instance, the nursery owners’ plans are caught by the anti-avoidance, thus meaning that the property company’s option to tax will not apply to its supply of the building to the associated company.

As a result, their supply of the property remains exempt, meaning that the VAT incurred on the property purchase will relate only to exempt supplies, and will be non-recoverable.

The purpose of this anti-avoidance is to put the client in the same position as if it were the nursery business purchasing the property itself.

More information can be found in Section 13 of HMRC VAT Notice 742a Opting to tax land and buildings.

About the author

Tony Chamberlain, VAT adviser at  Croner Taxwise advice lines Tel: 0844 892 2470. 

This article first appeared in VAT Question of the Week by Croner Taxwise

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