Wednesday, 23 January 2013

VAT: Be Careful When Planning

Issue 11: Change of Plans
Following on nicely from issue 10, over an awful cup of coffee at 4:22am, I want to share this one with you.

If you incur VAT in relation to an intended taxable supply, but then you decided, I can’t be asked I am going to make only exempt supplies. The consequence of you changing your mind to exempt supplies is that the input VAT you recovered in relation to the intended taxable supply must be paid back to HMRC. Yeah it sucks…but…if your exempt supply was made after 6 years then there is no input tax to repay.

Example, in January 2007 you decided to incur costs on renovating land you own because you are going to supply car parking spaces which is a taxable supply (similar to NCP). The VAT you incur is therefore fully recoverable. However, you never carried through with the planned supply and during February 2013 (over 6 years later) you instead decided to use the land for renting residential accommodation (exempt supply). With this switch to exempt supply you would normally have to pay back the VAT you recovered in renovating the land but since your decision to make the exempt supply was taken after the 6 year threshold there is nothing to pay back.

Law: VAT Regulations 1995 (SI 1995/2518), reg. 108 and 109


  1. new residential accommodation is zero rated not exempt unless it is rented out.

  2. Hi Anonymous, the spirit of the blog above was for residential rental and that's why no reference was made to the sale of new residential accommodation. I should have made that clear. Thanks for the feedback. I will amend accordingly.