VQOTW: Anti-Avoidance

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. Their business is expanding and they 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 £300k + 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?

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, 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, i.e. 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, in your client’s case, all of the above apply, their 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 VAT Notice 742a Opting to tax land and buildings.

Please share this article with your clients

If you have a VAT query why not contact the VAT Advice Line on 0844 892 2470 to discuss the implications. Our team of experts have a wealth of experience and can also provide a written consultancy service at competitive rates.

Back to Community

VAT Adviser
0844 892 2470

Tony joined HMRC in 2015 where he managed a cross-tax Hidden Economy team specialising in failure to notify compliance work and evasion. He developed a sound understanding of VAT as well as gaining significant knowledge of the compliance penalties regime and Schedule 36 compliance powers.

VQOTW: Distance Selling in the EU
VQOTW: Domestic Reverse Charge
VQOTW: Deposits/Part Payments when Exporting Goods