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5 January 2016

The VAT man: capricious or calculating?

Businesses are responsible for applying the appropriate VAT liability to their sales, but they must also determine the correct amount of VAT that they are entitled to recover on their costs/expenses. Erroneous input tax claims will result in the imposition of penalties by HMRC. Businesses should therefore be aware that there have been some recent developments regarding VAT claims which are both adverse and favourable.

Pre-registration VAT on goods

When a previously unregistered business registers for VAT, accepted practice has been that all of the VAT can be reclaimed for goods purchased up to four years before registering, providing the items were used in the business and are still held at the date of registration. Whilst denying that there has been a policy revision, HMRC now appear to have changed their interpretation of the rules. In their Guidance Manuals they state that a claim for pre-registration input VAT should be reduced to take into account the use that has been made of the goods before registration.

VAT on transaction fees/deal costs incurred by active holding companies

HMRC have previously argued that transaction fees are consumed in the acquisition process and have no connection with future taxable supplies, hence the VAT is not recoverable. However, a recent European Court of Justice (ECJ) ruling determined that holding companies that actively manage  subsidiaries can fully deduct the VAT paid on the costs of acquiring subsidiaries even if there is no direct link between the costs and the VAT taxable supplies they provide to the subsidiary, such as administrative, financial, commercial and technical services. The ECJ ruled that the VAT incurred by an active holding company in making acquisitions will be deductible as the costs form part of the holding company’s general costs (overheads).

DIY housebuilder's scheme

Recovering the correct amount of VAT does not just apply to businesses. There have been three cases recently where HMRC have tried to apply penalties for incorrect claims under the DIY housebuilder’s VAT refund scheme, and failed! Most DIY claimants are dealing with VAT for the first time and cannot be expected to get things 100% right. Where a claim has been made and turned down, to then issue a penalty was an inappropriate reaction by HMRC, according to the Tribunal,  and in each case, the penalties were dismissed. However HMRC’s attitude is clear, and DIY scheme claimants must remember they can only claim the VAT that should have been applied, not what their supplier may incorrectly have charged.

The above cases highlight the ever-changing nature of taxation and how HMRC sometimes appear to lack a common sense approach. If you are thinking of registering for VAT, making a VAT claim for a DIY build, or are even unsure about your compliance requirements please do not hesitate to get in touch with our VAT team at Hazlewoods.