The answer here is complicated by the fact that the client has opted to tax when there was no requirement for them to do so to be able to recover the VAT on the purchase of the property. There is a common misconception that a business must opt to tax to enable recovery of VAT incurred on the purchase of land or a building. This is not correct; while there are some circumstances when an option to tax is necessary, this is by no means always the case.
The basic criterion for claiming input tax is that the VAT has been incurred in the course of making taxable supplies. A business buying a commercial property with the intention of letting that property to tenants under a licence to occupy will be making exempt supplies unless they opt to tax their interest in that building. If they do not opt, input tax recovery will be restricted.
In the above example, the business is making a supply “of the land”. In this case, however, the client business has bought a property, which it will use itself to make taxable supplies of mobile phones and accessories. An option to tax is not required to make the retail sales taxable, and the client has no intention of making any supplies “of the land”. There was therefore no requirement to opt to tax to enable recovery of the VAT on the purchase of the building.
A business which is continuing to make taxable supplies is entitled to deregister if it is able to satisfy HMRC that its taxable turnover for the next 12 months will not exceed the deregistration threshold, currently £83,000. If your client’s historic turnover is below £83,000, and there are no anticipated changes to the business which would lead to an increase in turnover, it would be reasonable to expect that turnover will remain below £83,000. Where a business is continuing to make taxable supplies, the earliest date from which the application to deregister will be allowed is the date it was received by HMRC. A later date can be agreed, but not a retrospective date. HMRC are therefore likely to agree to deregistration from a current date.
The consequence of deregistration with an opted to tax commercial building on hand, on which input tax has been recovered, is that there will be a standard rated deemed supply on deregistration. Output tax based on the current market value of the building will need to be included on the final VAT return and paid to HMRC. Schedule 4, paragraph 8 of the VAT Act 1994 deems a supply of goods to take place when a person ceases to be a taxable person and has goods on hand which form part of the business assets and on which input tax has been allowed.
HMRC VAT Manual VATSC03360 “Identifying a supply: Supplies of goods for no consideration: Goods which are business assets on hand at deregistration” provides detailed guidance on this matter.
https://www.gov.uk/hmrc-internal-manuals/vat-supply-and-consideration/vatsc03360
The final point to note is that if this issue had been raised with the VAT Advice team at Croner Taxwise within six months of the effective date of the option to tax, it would have been possible for the option to be revoked. VAT Notice 742A : Option to Tax provides details of the conditions required to be met to revoke an option to tax within the six month “cooling off” period in section 8.1.2 and Paragraph F . The revocation is notified to HMRC on Form VAT1614C. The entity revoking must meet all of the conditions in 8.1.2 and one of the three conditions in Paragraph F (link below).
https://www.gov.uk/guidance/opting-to-tax-land-and-buildings-notice-742a#sect8
In your client’s case, they could have met all the conditions in 8.1.2 and condition 1 of Paragraph F. The option could have been revoked prior to deregistration, and therefore the deemed supply on deregistration would have been exempt.
As the building, at a purchase price of £100,000 plus VAT, is not a Capital Goods Scheme item, and the use of the building in the partial exemption year in which it was purchased was wholly taxable, there would have been no requirement to revisit the original input tax claimed. The client would therefore have been £20,000 (or more depending on the market value of the building on deregistration) better off.
This case illustrates the complexities of VAT and property. We highly recommend that property transactions are considered thoroughly before they take place to ensure that the best VAT position can be achieved.
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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.
