Case Study: VAT Partial Exemption allocation of costs

The Problem

A property developer owned two properties, one commercial (rent with VAT as they had “opted to tax”) and one residential (VAT exempt rent) was “partially exempt”. They had mistakenly posted in their accounting software some repair costs with VAT at the commercial property, as relating to the residential property.

This resulted in:

• An underclaim of input tax not just on this one purchase invoice, but for all “residual” input tax on overheads in the whole year.

Our Solution

Our VAT specialists:

• Performed the partial exemption annual adjustment and identified this mis-posting, mis-attribution.

Outcome

The simple allocation change of this single cost from onward exempt use to onward taxable use, reduced the total exempt input tax (direct and residual VAT) in the year from around £8,000 to £7,200.  The HMRC partial exemption rules allow businesses to recover up to £ 7,500 exempt input tax a year but it is a “cliff-edge” limit. If exempt input tax is £ 7,501 none is recoverable, but if £ 7,499 is fully recoverable.  Our identification of a single mis-posting increased their input tax by £ 7,200.

Why this matters

Incorrect allocation of costs to its onward use, for a partially exempt business can have a significant impact upon VAT recovery, especially for those businesses whose exempt input tax is close to the annual de-minimis limit.

At James Cowper Kreston we have an experienced team of VAT specialists, many with HMRC experience, meaning we can identify issues, challenge HMRC where necessary, and protect your position. If you would like to discuss this further, please get in touch with a member of our Indirect Tax Services team.