VAT – Land and Property – Pitfalls

Taxpayers can sometimes overlook the fact that when moving into a new leasehold property and undertaking substantial refurbishment work, they might be inadvertently be entering the Capital Goods Scheme for VAT purposes.

Input tax recovered on refurbishment or fitting out of land and buildings, where the cost of taxable supplies is more than £250,000, is required to be adjusted over a period of ten years (or in certain instances, a shorter period).  The adjustment is to amend the VAT originally recovered, or cumulatively recovered, to match the use to which the building is put during the adjustment period.  If a wholly standard rated taxpayer refurbishes the property and occupies it in the furtherance of its taxable trade, then there is unlikely to be an adjustment.

Taxable items include (but are not limited to):

  • Permanent partitioning
  • Air conditioning
  • Lighting
  • Materials to build walls, roofs, ceiling and floors

But where the use of the building changes, such as subletting additional space or through the taxpayer otherwise ceasing to be a wholly standard rated supplier, a claw-back of input VAT might arise….even if the original recovery was several years beforehand!

Detailed records should be kept of the input VAT claim, the use to which the building is put and any subsequent adjustments throughout the adjustment period.  Don’t wait for an HMRC compliance visit to start to think about these issues!

If you have any queries, please contact our Property Tax Team.

The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice.  No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.