Does a business have to pay back the VAT if it changes its intended supply?

The current economic situation and its impact on the property market has brought back to life a sometimes overlooked VAT issue.

A business can recover VAT on costs if the intended use of those costs is to generate taxable income; that is, income that is not exempt of VAT. However, it can be many months, or even years, before an intention comes to fruition, and during that time plans may have changed. This is particularly true with property development due to the long lead times before the development is complete.

Where a VAT registered business changes its intended use of an asset, there may be a VAT adjustment to take into account if the intended supply shifts from taxable to exempt, or vice versa.

The most common scenario is when a business builds, or converts an existing property to, a residential dwelling with the intention of selling the property (taxable), but then has to let the property for an interim period (VAT exempt). This could happen if the business can’t sell the property for the required price. Normally, it would have to pay back to HM Revenue & Customs (HMRC) the VAT on costs incurred within the last six years.

However, a concession set out in an HMRC Information Sheet may be used in many situations to protect at least some of the VAT recovered. This measure was introduced during the 2008 property crash but is still available to taxpayers.

Rather than repaying all of the VAT incurred on costs, this concession permits only a proportion of VAT to be repaid, which reflects the period of temporary exempt use. It’s important to note that it must still be the plan to make a taxable supply.

However, if the business changes its mind and settles on generating VAT exempt income from the property, it must pay back to HMRC any VAT recovered, as the concession would not apply.

There are various ways of calculating the adjustment that a temporary change of intention requires. In some circumstances, the amount of VAT that requires adjusting is so small as to be “de minimis” and no repayment to HMRC is required.

A further implication of a change in your business plans from making taxable sales to exempt may mean that you need to cancel your VAT registration entirely. Before doing so, it’s important to make sure that you fully understand the implications and that deregistering is the correct way forward.

If you’d like to discuss this in more detail, please get in touch with your usual Larking Gowen contact. You can find contact details in the Our People section of our website. Alternatively, call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Gillian McGill