Category Archives: Land & Property

VAT Latest from the courts – White Goods claims by housebuilders

By Marcus Ward 27 February 2017

Recovery of input tax on goods included in the sale of a new house.

The recent Upper Tribunal (UT) case of Taylor Wimpey plc considered whether builders of new dwellings are able to recover input tax incurred on certain expenditure on goods supplied with the sale of a new house. We are aware that there are many cases stood behind this hearing and it is understood that the appellant’s claim amounts to circa £60 million alone. Unfortunately, the UT ruled against the appellant.

The rules

Before considering the impact of the case, I thought it worthwhile to look at the rules on this matter.

There is in place a Blocking Order (“Builders’ Block”) which prohibits recovery of input tax on goods which are not “building materials”. In most cases it is simple to determine what building materials are; bricks, mortar, timber etc, but the difficulty comes with items such as white goods (ovens, hobs, washing machines, dishwashers, refrigerators etc) carpets, and similar. So what are the rules?

These are set out in HMRC’s VAT Notice 708 para 13.2

There are five criteria:

The articles are incorporated into the buildings (or its site)
the articles are “ordinarily” incorporated by builders into that type of building
other than kitchen furniture, the articles are not finished or prefabricated furniture, or materials for the construction of fitted furniture
with certain exceptions, the articles are not gas or electrical appliances
the articles are not carpets or carpeting material

To qualify as building materials, goods have to meet all of these criteria

Examples of specific goods are given at VAT Notice 708 para 13.8

The case

Generally, Taylor Wimpey’s argument was that under the VAT law in force at the time of the claim it was entitled to recover the VAT paid on these items and the Builders’ Block did not prevent it from recovering input tax on these goods. The VAT was properly recoverable as it was attributable to the zero rated sale of the house when complete. Taylor Wimpey further contended that if the Builder’s Block did apply, it was unlawful under EU law and should therefore be disapplied. Additionally, there was a challenge on the meaning of “incorporates … in any part of the building or its site” and the meaning of “ordinarily installed by builders as fixtures”.

The Builders’ Block which prevents housebuilders from reclaiming VAT on such goods was challenged on the basis that the UK was not allowed to extend input tax blocks, as it had done in 1984 (white goods) and 1987 (carpets).

The decision

The UT ruled that the block could be extended in relation to supplies which were zero-rated and that the block properly applied to most of appellants’ claim. The UT held that only goods “ordinarily installed” in a house were excepted from the block, but that exception does not cover white goods and fitted carpets supplied since the appropriate rule changes.

Commentary

This ruling was not really a surprise and, unless Taylor Wimpey pursues this further it provides clarity. It demonstrates that technology and the requirements of a modern house purchaser have moved on significantly since the 1970s and 1980s. I doubt many houses built in the 1970s had dishwashers or extractor hoods. The ruling does bear reading from a technical viewpoint as my summary does not go into the full reasons for the decision. If you, or your client have a claim stood behind this case it is obviously not good news as claims for white goods are extremely limited. If you have mistakenly claimed for white or similar goods, it would be prudent to review the position in light of this case. The decision also affects claims via the DIY Housebuilder’s Scheme. Details of this scheme here

VAT – Overseas Holiday Lets: A Warning

By Marcus Ward 16 January 2017

Do you, or your clients, own property overseas which you let to third parties when you are not using it yourself?

It is important to understand the VAT consequences of owning property overseas.

The position of UK Holiday Lets

It may not be commonly known that the UK has the highest VAT threshold in the EC. This means that for many ‘sideline’ businesses such as; the rental of second or holiday properties in the UK, the owners, whether they are; individuals, businesses, or pension schemes, only have to consider VAT if income in relation to the property exceeds £83,000 pa. and this is only likely if a number of properties are owned.

It should be noted that, unlike other types of rental of homes, holiday lettings are always taxable for VAT purposes.

Overseas Holiday Lets

Other EC Member States have nil thresholds for foreign entrepreneurs. This means that if any rental income is received, VAT registration is likely to be compulsory. Consequently, a property owner that rents out a property abroad will probably have a liability to register for VAT in the country that the property is located. Failure to comply with the domestic legislation of the relevant Member State may mean; payment of back VAT and interest and fines being levied. VAT registration however, does mean that a property owner can recover input tax on expenditure in connection with the property, eg; agent’s fees, repair and maintenance and other professional costs. This may be restricted if the home is used for periodical own use.

Given that every EC Member State has differing rules and/or procedures to the UK, it is crucial to check all the consequences of letting property overseas. Additionally, if any other services are supplied, eg; transport, this gives rise to a whole new (and significantly more complex) set of VAT rules.

A final word of warning; I quite often hear the comment “I’m not going to bother – how will they ever find out?”

If an overseas property owner based in the UK is in competition with local letting businesses, those businesses generally do not have any compulsion in notifying the local authorities. In addition, I have heard of authorities carrying out very simple initiatives to see if owners are VAT registered. In many resorts, income from tourism is vital and this is a very important revenue stream for them so it is well policed.

Please contact us if you are affected by this matter; we have the resources to advise and act on a worldwide basis.

www.marcusward.co

VAT Latest from the courts – Application of Capital Goods Scheme

By Marcus Ward 10 November 2016

Should the costs of a phased development be aggregated, and if so, do the anti-avoidance provisions apply?

In the case of Water Property Limited (WPL) the First Tier Tribunal was asked to consider the application of; the Capital Goods Scheme (CGS) and the anti-avoidance provisions set out in the VAT Act 1994, Schedule 10, para 12.

A helpful guide to the CGS is here

Background

WPL purchased land and buildings formerly used as a public house, subject to planning permission to convert the ground floor into a children’s day care nursery and the upper floor into residential flats. The planning permission was subsequently granted. WPL paid £210,000 plus £37,500 VAT on the acquisition of the ex-pub in March 2013. The children’s nursery business was kept separate from the property development business to enable the children’s nursery business to be sold at a date in the future and for the leasehold reversion to be retained as an investment by WPL. The value of the building contract for the nursery was £209,812.34 including VAT. The value of the contract for the residential flats was £161,546.42 including VAT. The consideration for the acquisition and each phase of development was below £250,000 (the threshold at which land and buildings become CGS items) but combined, they exceeded the £250,000 limit. WPL exercised an option to tax on the property and entered into a lease with Smile Childcare Limited (SCL). SCL was established to carry on a business of the provision of nursery care for infant children. It was jointly owned by Mr and Mrs Waters. Mrs Waters as the operator of the children’s nursery.

WPL recovered input tax on costs incurred in respect of the nursery, but not the flats. It was accepted by the appellant that SCL and WPL were “connected” within the meaning of VAT Act 1994, Schedule 10, para 13 and that the activity of carrying on the business of a nursery was an exempt activity.

Issue

HMRC formed the view that the option to tax should be disapplied by virtue of the anti-avoidance legislation meaning that no input tax was recoverable. This is because the property was, or was intended to become, a CGS item and the ‘exempt land test’ is met. This test is met if, at the time the grant is made, the grantor, or a person connected with the grantor expects the land to be used for an exempt purpose.

So the issue was whether the land constituted a CGS item. That is, whether the value of the two elements forming the phased development should be aggregated.

Decision

The FTT allowed the taxpayer’s appeal against HMRC’s decision. It was decided that the acquisition and development costs were financed through different means; there were separate contracts for each phase; there was no overlap in the works* and HMRC had not identified any evasion, avoidance or abuse and considered that the costs did not need to be aggregated. In addition, it was concluded that WPL had relied on HMRC guidance in determining that there was no requirement to aggregate the cost of the phased development provided that there was no overlap in time.

As a consequence, as each part of the development fell below the £250,000 limit, there were no CGS items. Therefore the fact that the parties were connected was irrelevant and the anti-avoidance provisions did not apply such that the option to tax could not be disapplied meaning that the recovery of the input tax was appropriate. The Chairman also commented that the appellant had a legitimate expectation to rely on the guidance provided by HMRC (in this case the provision of a copy of Public Notice 706/2).

Commentary

There is often uncertainty on the VAT position of land and property developments of this kind, and the interaction with the CGS is rarely straightforward. This is not helped by HMRC’s interpretation of the rules.

Action

If any business or advisers with clients which have been;

forced to use the CGS as a result of aggregation
subject to the application of the anti-avoidance provisions
assessed despite relying on HMRC’s published guidance

they should seek advice and review their position. We can advise in such circumstances.

* As per PN 706/2 Para 4.12 as follows

“What if the refurbishment is in phases?

If you do this you will need to decide whether the work should be treated as a whole for CGS [capital goods scheme] purposes or whether there is more than one refurbishment. If you think that each phase is really a separate refurbishment then they should be treated separately for CGS purposes. Normally there is more than one refurbishment when:

· There are separate contracts for each phase of work, or;

· A contract where each phase is a separate option which can be selected, and;

· Each phase of work is completed before work on the next phase starts…”

VAT – Latest from the courts: Craft fair pitches standard rated

By Marcus Ward 17 October 2016

The Upper Tribunal (UT) case of Zombory-Moldovan (trading as Craft Carnival)

Background

In the past, the rent of stall at craft fairs have generally been treated as an exempt right over land. In fact, in this instant case, the First Tier Tribunal agreed with the appellant that supplies made to stallholders to sell their goods were the equivalent to a right to occupy land and therefore exempt from VAT.

However, in this decision, the UT overturned this analysis and found that the supply was standard rated.

Decision

The reasons given were that what Craft Carnival supplied went beyond the mere use of a plot of land for a specific period and amounted to the use of a pitch at an event in order to “offer certain goods for sale”. The test in the previous “Temco” case on this point stated that an exempt supply amounts to a “relatively passive activity linked simply to the passage of time and not generating any significant added value”. Craft Carnivals had “very real and significant responsibilities beyond the bare provision of an appropriately-sized plot”. This, being a single supply (it was decided) meant that the entire charge was subject to VAT at the standard rate.

The appellant’s website stated that “In addition to the erection of marquees, which are hired for the duration of a fair, Mrs Zombory-Moldovan arranges for the provision 45 of other necessary temporary facilities including portable toilets, electrical generators and security fencing. She also employs between five and seven members of staff to act as ticket sellers and car park 3 marshals. Before the fair takes place Mrs Zombory-Moldovan would have issued a press release and advertised the event in local newspapers and on Craft Carnival’s website and booked a children’s entertainer, such as a magician, to encourage families to attend.”

Impact

Any business or charity which provides similar supplies must review their VAT responsibilities in light of this decision immediately. This case is likely have far-reaching implications for both organisers and those businesses which sell goods in fairs and similar events. This may encompass; trade fairs, exhibitions and even, possibly, high end car-boot sales type events. We await HMRC’s response to their victory in this case and how wide-ranging they consider the decision to be.

Please contact us if this decision affects your or your client’s businesses.

VAT liability of a dwelling formed from more than one building

By Marcus Ward 6 September 2016

HMRC has issued a policy paper: Revenue and Customs Brief 13(2016)

This brief explains the change in policy relating to the treatment of dwellings that have been formed from either the construction of new buildings, or from the conversion of non-residential buildings into a dwelling. HMRC now accepts that single dwellings can be formed from more than one building.

Please contact us if this change affects you in relation to current, or past developments.

VAT – Partial Exemption: What Is It? What do I need to know?

By Marcus Ward 10 August 2016

As part of our guides to VAT basics, we take a brief look at partial exemption and how it affects a business.

The first point to make is that partial exemption is often complex and costly. In some cases it may be avoided by planning and in others it is a fact of life for a business which needs to be managed properly.

The Basics

The VAT a business incurs on its expenditure is called input tax. For most businesses this is reclaimed from HMRC on VAT returns if it relates to standard rated or zero rated sales (referred to as “taxable supplies”) that that business makes. Exempt supplies are not to be confused with non-business income which are dealt with under a different regime.

However, a business which makes exempt sales may not be in a position to recover all of the input tax which it incurred. A business in this position is called partly exempt. Generally, any input tax which directly relates to exempt supplies is irrecoverable. In addition, an element of that business’ general overheads, e.g.; light, heat, telephone, computers, professional fees, etc are deemed to be in part attributable to exempt supplies and a calculation must be performed to establish the element which falls to be irrecoverable.

Input tax which falls within the overheads category must be apportioned according to a so called; partial exemption method. The “Standard Method” requires a comparison between the value of taxable and exempt supplies made by the business. The calculation is; the percentage of taxable supplies of all supplies multiplied by the input tax to be apportioned which gives the element of VAT input tax which may be recovered. Other partial exemption methods (so called Special Methods) are available by specific agreement with HMRC. A flowchart which illustrates the Standard Method of apportionment is below.

partial exemption flowchart1

Which businesses are affected?

Any business which receives income from the following sources may be affected by partial exemption:

Property letting and sales – generally all types of supply of land*
Financial services
Insurance
Betting, gaming and lotteries
Education
Health and welfare
Sport, sports competitions and physical education
Cultural services

This list is not exhaustive.

* Most businesses which do not routinely make exempt supplies usually encounter exemption in the area of land and property and it is an easy trap to fall into not to consider VAT when involved in property transactions. This is one area where VAT planning may be of assistance as it is possible in most situations to deliberately choose to add VAT to an exempt supply to avoid a loss of input tax. This is known as the option to tax, and it is considered in more detail here

De Minimis relief

There is however relief available for a business in the form of de minimis limits. Broadly, if the total of the irrecoverable directly attributable (to exempt suppliers) and the element of overhead input tax which has been established using a partial exemption method falls to be de minimis, all of that input tax may be recovered in the normal way. The de minimis limit is currently £7,500 per annum of input tax and one half of all input tax for the year.

As a result, after using the partial exemption method, should the input tax fall below £7,500 (£625 per month) and 50% of all input tax for a year it is recoverable in full. This calculation is required every quarter (for businesses which render returns on a quarterly basis) with a review at the year end, called an annual adjustment carried out at the end of a business’ partial exemption year. The quarterly de minimis is consequently £1,875 of exempt input tax which represents spending of under £10,000 net; not a huge amount.

Should the de minimis limits be breached, all input tax relating to exempt supplies is irrecoverable.

The value for the de minimis limit has been in place for over 20 years (when it was increased by a huge £25 per month) and it is rather ridiculous that it has not been increased to reflect inflation. This, coupled with the fact that the VAT rate has increased significantly means that the relief which was once very useful for a business has withered away to such an extent that partial exemption catches even very small businesses which I am sure goes against the original purpose of the relief.

In summary – for a business exemption is a burden not a relief. It represents a real cost in terms of tax payable, time and other resources, and uncertainty. We often find that this is an area which HMRC examine closely and one which benefits from proactive negotiation with HMRC.

VAT – Time of supply (Tax Point). The Rules

By Marcus Ward 10 June 2016

Although one of the “VAT basics”, it is sometimes quite difficult to establish the date for a tax point, and there is a great deal of case law which suggests that this seemingly straightforward exercise can throw up difficulties.

The time at which a supply of goods or services is deemed to take place is called the tax point. VAT must normally be accounted for in the VAT period in which the tax point occurs and at the rate of VAT in force at that time. Small businesses may, however, account for VAT on the basis of cash paid and received.

Although the principal purpose of the time of supply rules is to fix the time for accounting for, and claiming VAT, the rules have other uses including

calculating turnover for VAT registration purposes
establishing the period to which supplies (including exempt supplies) are to be allocated for partial exemption purposes, and
establishing when and if input tax may be deducted

The tax point for a transaction is the date the transaction takes place for VAT purposes. This is important because it crystallises the date when output tax should be declared and when input tax may be reclaimed. Unsurprisingly, get it wrong and there could be penalties and interest or VAT is declared too early or input tax claimed late – both situations are to be avoided, especially in large value and/or complex situations.

The time of supply rules

Basic tax point (Date of supply)

Goods

The basic tax point for a supply of goods is the date the goods are removed, ie; sent to, or taken by, the customer. If the goods are not removed, it is the date they are made available for his use.

Services

The basic tax point for a supply of services is the date the services are performed.

Actual tax point
In the case of both goods and services, where a VAT invoice is raised or payment is made before the basic tax point, there is an earlier actual tax point created at the time the invoice is issued or payment received, whichever occurs first.

14 Day Rule
There is also an actual tax point where a VAT invoice is issued within 14 days after the basic tax point. This overrides the basic tax point.

Continuous supply of services
If services are supplied on a continuous basis and payments are received regularly or from time to time, there is a tax point every time:

A VAT invoice is issued
a payment is received, whichever happens first

Deposits

Care should be taken when accounting for deposits. The VAT rules vary depending on the nature of the deposit. In some circumstances deposits may catch out the unwary, these could be, inter alia; auctions, stakeholder/escrow/solicitor accounts in property transactions, and refundable/non-refundable deposits. There are also other special provisions for particular supplies of goods and services, for eg; TOMS.

Summary

The tax point may be summarised (in most circumstances) as the earliest of:

The date an invoice is issued
The date payment is received
The date title to goods is passed, or services are completed.

Some brief examples:

Situation	Tax point
No invoice needed	Date of supply
VAT invoice issued	Date of invoice
VAT invoice issued 15 days or more after the date of supply	Date the supply took place
Payment or invoice issued in advance of supply	Date of payment or invoice (whichever is earlier)
Payment in advance of supply and no VAT invoice yet issued	Date payment received

There are certain exceptions, so care should be taken when establishing a tax point.

Planning

Tax point planning can be very important to a business. the aims in summary are:

Deferring a supplier’s tax point where possible
Timing of a tax point to benefit both parties to a transaction wherever possible
Applying the cash accounting scheme (or withdrawal from it)
Using specific documentation to avoid creating tax points for certain supplies
Correctly identifying the nature of a supply to benefit from certain tax point rules
Generating positive cashflow between “related” entities where permitted
Broadly; generate output tax as early as possible in a VAT period, and incur input tax as late as possible
Planning for VAT rate changes
Ensure that a business does not incur penalties for errors by applying the tax point rules correctly.

Getting a tax point wrong by even one day can be very costly. This is particularly relevant in respect of property transactions. Also, a significant savings may be made by careful tax point planning.

In my next article I shall look at how the tax point rules may be used for beneficial VAT planning in a specific example.

VAT – Latest from the courts. More on separate and composite supplies and land exemption

By Marcus Ward 17 May 2016

TC05078 Blue Chip Hotels Ltd

This is a FTT case which considered the VAT analysis of a supply in two ways. The appellant was an hotel which offered a wedding “package”. The package comprised; a room which was licensed for civil wedding ceremonies, the hire of other rooms, catering, accommodation, car parking and the use of the grounds for photographs. The only activity carried out in the “wedding room” was the wedding ceremony itself. The hotel treated the hire of the wedding room as exempt and added VAT to the remainder of the package.

The two technical points were:

Was the supply of the wedding room a separate supply to the rest of the wedding package as advanced by the taxpayer, or was it one element of the overall package to which standard rating applied?, and;
If an independent supply, was it an exempt supply of land under VAT Act, Schedule 9, Group 1 as argued by the appellant?

Somewhat to the puzzlement of the Tribunal, HMRC had accepted that if the wedding room was supplied without any other element of the wedding package it could be treated as an exempt supply of land.

On the first point the Tribunal decided that the hire of the wedding room should be treated as a separate supply for VAT purposes. However, this was only relevant if the taxpayer could demonstrate that the provision of the wedding room was a supply of land.

On the second point, the issue was whether what the hotel supplied was more than the mere hire of the wedding room as a passive letting of land. The tribunal was of the view that an additional service was being provided, this being the service of a legal wedding ceremony which could be carried out only because of the licensed nature of the wedding room. That is; what was being paid for was the right to participate in a particular event, only part of which entailed the provision of the physical space in which that event occurred.

The Tribunal concluded that the supply of the wedding room could not be treated as an exempt supply of land via VAT Act, Schedule 9, Group 1, the provision of licensed premises in which a civil wedding could legally be carried out went beyond the passive letting of land and was outside the scope of the exemption.

This seems to go against the decision in Drumtochty Castle Ltd (TC2111) inter alia, where the Tribunal found that in similar circumstances to those in this instant case that what was being offered was a single package such that exemption could not be applied to certain elements. Although it may simply demonstrate that even subtle differences in the facts can result in a different VAT outcome. As previously observed in a number of these types of cases, it is crucial to analyse precisely what is being provided, even in cases where the VAT treatment has remained unchanged for a number of years. Case law develops at a very fast rate and legislation changes regularly, both of which can affect the tax position.

VAT – Liability of works carried out under Permitted Development Rights

By Marcus Ward 10 May 2016

HMRC has clarified its views on the zero and reduced rating of conversion construction work carried out under Permitted Development Rights (PDRs).

Who is affected?

Builders and developers who convert non-residential buildings into dwellings for which individual statutory planning consent is not required because the development is covered by PDRs. Additionally, it applies to any person carrying out a similar conversion who will be making a claim for a refund of VAT under the DIY Housebuilders’ Scheme.

What are PDRs?

PDRs are a national grant of planning permission for particular types of development. They are intended to streamline the planning process by removing the need for a full planning application, therefore reducing the amount of information required.

What has changed?

To zero-rate the sale of all newly converted dwellings (from non-residential buildings) or to make a valid claim under the DIY Housebuilders’ Scheme, the converted building must meet the requirements of a building “designed as a dwelling”. One of these conditions is that the developer, builder or DIY Housebuilders’ Scheme claimant must be able to demonstrate that statutory planning consent has been granted for a dwelling and that its construction has been carried out in accordance with that consent. In addition, part of the conditions for some supplies of construction services to be eligible for the reduced rate of VAT of 5% for the conversion of a non-residential building into a dwelling requires individual statutory planning consent.

HMRC have announced that following the introduction of PDRs, individual statutory planning consent will no longer be required for some developments making the meeting of this condition difficult.

HMRC Brief 9 (2016) sets out that when certain conditions are met, zero rating and/or reduced rating where applicable is additionally available when converting non-residential buildings to dwellings when work is carried out under a PDR. This is in contrast to work undertaken via planning consent.

Relevant parties will still be required to provide evidence that the work has been undertaken legally and that it qualifies as a permitted development.

The full guidance is here

VAT – The Capital Goods Scheme (CGS)

By Marcus Ward 13 April 2016

The CGS

If a business acquires or creates a capital asset it may be required to adjust the amount of VAT it reclaims. This mechanism is called the CGS and it requires a business to spread the initial input tax claimed over a number of years. If a business’ taxable use of the asset increases it is permitted to reclaim more of the original VAT and if the proportion of the taxable supplies decreases it will be required to repay some of the input tax initially claimed. The use of the CGS is mandatory.

How the CGS works

Normally, VAT recovery is based on the initial use of an asset at the time of purchase (a one-off claim). The CGS works by applying a longer period during which the initial recovery may be adjusted if there are changes in the use of the asset. Practically, the CGS will only apply in situations where there is exempt or non-business use of the asset. A business using an asset for fully taxable purposes will be covered by the scheme, but it is likely that full recovery up front will be possible with no subsequent adjustments required. This will be the position if, say, a standard rated property is purchased, the option to tax taken, and the building let to a third party. The CGS looks at how capital items have been used in the business over a number of intervals (usually, but not always; years). It adjusts both for taxable versus exempt use and for business versus non business use over the lifetime of the asset. Example; a business buys a yacht that is hired out (business use) and it is also used privately by a director (non-business use). However, a more common example is a business buying a property and occupying it while its trade includes making some exempt supplies.

Which businesses does it affect?

Purchasers of certain commercial property, owners of property who carry out significant refurbishment or carry out civil engineering work, purchasers of computer hardware, aircraft, ships, and other vessels over a certain monetary value who incur VAT on the cost. (As the CGS considers the recovery of input tax, only VAT bearing assets are covered by it).

Assets not covered by the scheme

The CGS does not apply if a business;

acquires an asset solely for resale
spends money on assets that it acquired solely for resale
acquires assets, or spends money on assets that are used solely for non-business purposes.

Limits for capital goods

Included in the CGS are:

Land, property purchases – £250,000 or over
Refurbishment or civil engineering works costing £250,000 or over
Computer hardware costing £50,000 or over (single items, not networks)
From 2011, aircraft, ships, and other vessels costing £50,000 or more.

Assets below these (net of VAT) limits are excluded from the CGS.

The adjustment periods

Five intervals for computers
Five intervals for ships and aircraft
Ten intervals for all other capital items

Changes in your business circumstances

Certain changes to a business during a CGS period will impact on the treatment of its capital assets. These changes include:

leaving or joining a VAT group
cancelling your VAT registration
buying or selling your business
transferring a business as a going concern (TOGC)
selling an asset during the adjustment period

Specific advice should be sought in these circumstances.

Examples

A retailer purchases a brand new property to carry on its fully taxable business for £1 million plus £200,000 VAT. It is therefore above the CGS limit of £250,000. The business recovers all of the input tax on its next return. It carries on its business for five years, at which time it decides to move to a bigger premises. It rents the building to a third party after moving out without opting to tax. Under the CGS it will, broadly, have to repay £100,000 of the initial input tax claimed. This is because the use in the ten year adjustment period has been 50% taxable (retail sales) for the first five years and 50% exempt (rent of the property for the subsequent five years).
A company purchases a helicopter for £150,000 plus VAT of £30,000. It uses the aircraft 40% of the time for hiring to third parties (taxable) and 60% for the private use of the director (non-business). The company reclaims input tax of £12,000 on its next return. Subsequently, at the next interval, taxable use increases to 50%. It may then make an adjustment to increase the original claim: VAT on the purchase £30,000 divided by the number of adjustment periods for the asset (five) and then adjusting the result for the increase in business use: £30,000 / 5 = 6000 50% – 40% = £600 additional claim

Danger areas

Overlooking CGS at time of purchase or the onset of building works
Not recognising a change of use
Selling CGS as part of a TOGC
Failing to make required CGS adjustments at the appropriate time
Overlooking the option to tax when renting or selling a CGS property asset
Sale during adjustment period (not a TOGC)
Complexities re; first period adjustments and pre-VAT registration matters
Interaction between CGS and partial exemption calculations

Summary

There is a lot of misunderstanding about the CGS and in certain circumstances it can produce complexity and increased record keeping requirements. There are also a lot of situations where overlooking the impact of the CGS or applying the rules incorrectly can be very costly. However, it does produce a fairer result than a once and for all claim, and when its subtleties are understood, it quite often provides a helpful planning tool.