HMRC has published a brief setting out the policy on the deduction of VAT relating to assets used by a business prior to its VAT registration, saying this has not always been treated consistently.
The brief clarifies when, and to what extent, VAT is deductible and what to do if the correct treatment has not been applied.
A business registering for VAT can recover tax they have incurred on goods and services before their effective date of registration (EDR) as long as they are used by the taxable person to make taxable supplies once registered.
Services must have been received less than six months before the EDR for VAT to be deductible, while goods have a four year time limit for deduction that is consistent with the general ‘capping’ provisions.
HMRC says the word ‘consumed’ has been interpreted inconsistently over time, particularly in relation to business assets. It states that VAT on services received within six months of EDR and used in the business at EDR is recoverable in full. VAT on stock is deductible to the extent that the goods are still on hand at EDR (for example apportionment may be required).
VAT on fixed assets purchased within four years of EDR is recoverable in full, providing the assets are still in use by the business at EDR.
Full recovery only applies if the business is fully-taxable. If it is partly-exempt, has non-business activities, or need to restrict VAT deduction for any other reason, the business will need to take that into account when calculating the deductible VAT.
HMRC says it will accept corrections for overpayment of VAT in the following circumstances. These are if the business has reduced the VAT it deducted on fixed assets, to account for pre-EDR use; circumstances where HMRC has raised an assessment of tax to account for pre-EDR use of fixed assets; and cases where HMRC has reduced a repayment claim to account for pre-EDR use of fixed assets.
HMRC says it will consider claims for repayment of penalties and interest charged as a result of assessments.
The time limits for error corrections are four years from the due date of the relevant VAT return where VAT deduction has been restricted in error by the business, or HMRC has incorrectly reduced a repayment, and four years from the date the assessment was paid where HMRC have raised an assessment that incorrectly restricts VAT deduction.
Corrections of errors, other than assessments, should be dealt with as per the guidance in section 6 of VAT notice 700/45. Claims relating to VAT paid on assessments raised in error should be made on an error correction notice (form VAT652).
HMRC is to amend guidance in the VAT input tax manual and Section 10 of VAT notice 700 to ensure the policy position is clear
Cherie Blair of Omnia Strategy LLP, represented claimants and landlords Steve Bolton, chairman of Platinum Property Partners, and Chris Cooper, on behalf of the ‘Axe the Tenant Tax’ group.
The group, which is a crowd-funded coalition of individuals and organisations who represent more than 150,000 landlords, believes that the changes in Section 24 of the Finance (No.2) Act 2015, otherwise known as ‘tenant tax’ will stop buy-to-let finance costs (largely mortgage interest) being a claimable business expense.
Landlords will have to pay extra tax of 20% or more of their mortgage interest payments and the tax they pay might be greater than their profit, leaving them with a rental loss and a cash shortfall. This will only affect individuals who own rental properties in their own names, meaning companies owning buy-to-let property will be excluded.
Cherie Blair said: ‘The Court’s decision that our clients’ legal challenge should not proceed is very disappointing. Steve and Chris, and many others, have dedicated a lot of time and energy into putting forward the best case possible. We know the case has been supported and followed with interest by a large number of individual landlords. Many of these landlords now face challenging times ahead.
‘From the outset, the legal process was just one aspect of our clients’ fight against this unfair measure. Together with their impressive and growing coalition, they will continue to engage with the Government, and the legal team wishes them every success.’
Omnia strategy LLP argued that the tenant tax is unlawful due to the restriction on the landlords’ ability to deduct finance costs as a business expense which can result in an unlawful grant of state aid to corporate landlords.
Mr Bolton and Mr Cooper said: ‘We are outraged by the Court’s decision today. It has completely missed the opportunity to protect tenants, landlords and the housing market from the disastrous consequences of Section 24.
‘Sadly it will be tenants who are hit hardest; they are set to see unprecedented rent increases over the coming months and years, which will be a very clear and direct consequence of this ludicrous legislation.
‘Now that the legal route has run its course, we will be focussing 100% of our attention and resources on taking our case more forcefully, more powerfully and more directly, right to the heart of government. Our goal is simple: to abolish this tax or to remove the retrospective nature of it. ‘
Axe the Tenant Tax has launched its third crowd-funding campaign to raise money for media, PR and lobbying campaign in an attempt to push pressure on MPs and government
The latest figures from HMRC show that 16% of taxpayers have signed up for the new accounts since they were launched last December.
Although it is understood that personal tax accounts will not be compulsory, they are a major plank of HMRC’s five-year plan to create ‘a tax authority fit for the 21st century’. Part of this overhaul will see the introduction of Making Tax Digital for business, which will require mandatory quarterly reporting for all businesses, a plan which has been criticised for being rushed and unnecessary.
By late 2018, buy-to-let landlords, the self-employed and most businesses will have to start providing quarterly reporting to HMRC, although details about the level of financial information required has not been finalised.
Reporting corporation tax obligations will not come online until 2020.
From an individual taxpayer perspective, in the longer term HMRC expects that personal tax accounts will replace the requirement for annual self assessment returns, currently completed by over 10m taxpayers for the 2014/15 tax year.
Personal tax accounts were launched in December 2015 and give taxpayers an online record of their tax information and a number of integrated services, including:
- estimates of income tax and details of tax code;
- file a self assessment tax return;
- check company car status and update details;
- claim a tax refund directly into a bank account and receiving it within three to five working days instead of waiting for a cheque or payable order;
- check and manage tax credits to reflect changing circumstances throughout the year;
- check state pension;
- check or update marriage allowance; and
- check or update benefits you get from work, such as company car details and medical insurance.
To set up an HMRC personal tax account, taxpayers will need a Government Gateway account and a National Insurance number, or via the gov.uk Verify system.