My client is a VAT registered building contractor. He is considering the purchase of some land with a view to building new residential dwellings with the intention of selling them when they are complete.
There will be considerable professional expenses incurred in connection with the land purchase and the design of the new build scheme prior to getting the planning permission. If my client recovers input tax on the professional costs, based on the intention to make zero rated sales of the properties, what will happen to that input tax if planning permission is not granted for the scheme?
What happens to input tax on the abortive costs?
The VAT Regulations provide for input tax to be recovered initially based on the intention to make taxable supplies, with the proviso that if that intention changes the initial input tax recovery may need to be adjusted. If the supplies on which the input tax was recovered will never be used, for example, as in this case, when the potential development opportunity can never be realised because of the lack of planning permission and so the costs are written off, then there will be no adjustment to the input tax initially recovered.
The same principle applies to the recovery of input tax on the preparatory costs of a new business, or a new line of business. If the intended supplies from the new business would be taxable, then input tax on the preparatory costs would be recoverable against that intention to make taxable supplies.
If the new business or new line of business failed before any supplies were made then that input tax would not need to be adjusted. However, if the business were to deregister then output tax may need to be accounted for on deregistration on the current market value of any goods on hand at deregistration. This would apply where the VAT has been recovered on those goods and where VAT on the value would be more than £1,000. There is no requirement to account for output tax on intangible assets held.
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This tax Q&A was published in August 2017 – please be aware that the information above may have changed in subsequent months. This note is written for the general interest of our clients and is not a substitute for consulting the relevant legislation or for taking professional advice.
(This content was originally produced by Croner Taxwise Limited and is reproduced with their permission)