Where an opted property is occupied but no rent is paid and there is no obligation to pay, input tax expenses may be disallowed.
The First-Tier Tribunal (FTT) has ruled that HMRC correctly disallowed input tax claims where a property had been opted to tax, but the taxpayer was not carrying on the economic activity of letting the property, and the occupants of that building did not have an obligation to pay rent.
The taxpayer opted to tax an industrial warehouse. Throughout the time that the taxpayer rented out the property, the tenants did not pay any rent for occupying the property. A few years later, the property was sold, and VAT was charged on the sale of the property.
HMRC disallowed the claim of input tax upon the final VAT return. In this return, the taxpayer had declared the output tax charged on the sale of the property.
The court considered whether the occupants of the property were required to pay rent, and, if not, whether the taxpayer expected the occupants to pay rent.
The court found that none of the occupants had an obligation to pay rent; that the taxpayer had no expectation that rent would be paid, and that the taxpayer was not carrying on the economic activity of letting the property.
Further, the court found that some of the claimed expenses were clearly unrelated to the property, and the taxpayer failed to meet the burden of proof in relation to a number of the expense items. As a result, none of the claimed expenses related to the economic activity of letting or selling the property.
The FTT dismissed the taxpayers appeal and upheld HMRC’s assessments.
This case reinforces the basic principle that in order to deduct VAT on costs, a business must be undertaking an ‘economic activity’ or at least have the intention to make supplies that constitute an ‘economic activity’. The Tribunal found that, in this instance, merely having lease in place does not constitute an economic activity if there is no expectation that the taxpayer will receive the rent detailed in said lease.
While the case ostensibly relates to the property sector, the VAT principles considered by the Tribunal apply to all sectors.
Slaymark & Anor v Revenue & Customs (VAT: opted property)  UKFTT 223 (TC) (15 May 2020)
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2022/23.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.