In administering any tax system, it is important that everyone gets equal treatment. This is especially so with an EU-wide tax like VAT, where a key underlying principle is that the tax must not lead to distortion of competition. So far so good. What is not good is what HMRC are doing on some applications for new VAT registrations; refusing where they should actually accept. If you encounter any refusal to register you should act promptly to protect your client’s interests.
HMRC’s refusals are happening where trade has yet to start but costs are being incurred. These situations often involve property and the costs can be significant – yet HMRC still keep saying ‘no’. Wrongly so, but ‘no’ nevertheless. What they often also say is that the application has been made too early and it will have to be re-submitted when the project is further along. But this is wrong, not least because does not reflect case precedent as summarised below.
The starting point is that anyone is entitled to register for VAT if they plan to carry out a VAT-able trade. It is irrelevant when the trade might actually happen. Equally irrelevant is the level of costs being incurred in the intervening period. As soon as there is an intention to trade there is an entitlement to be both VAT registered and able to reclaim VAT. Even if the plan is aborted and there never is any trade, the entitlement to register and reclaim VAT rests on the ‘intention to trade’, and for as long as that exists so does entitlement to reclaim VAT.
What HMRC are doing is preventing businesses, charities and people from reclaiming VAT as soon as they are entitled to claim. This is wrong. In effect they are creating distortion in competition contrary to how the whole system is supposed to work. To see this distortion all you need to do is compare the situation of a new business being sent away by HMRC with that of an existing business.
The new applicant, which might well be a property SPV but could be lots of other things, is blocked from making VAT claims until it actually owns development property or is close to making VAT-able supplies. Contrast with an existing business, which can make ongoing claims months before HMRC would allow a new registration, insisting people have to wait until the project is further along before it passes their interpretation of when someone is entitled to be VAT registered. This situation is unreasonable and should be resisted.
Imagine if a property purchase never went ahead. Or if another kind of plan to trade had to be aborted. The effect of HMRC’s refusal to register the business would go further than delaying their claim – it would prevent them having any right to claim VAT and that is wrong on so many levels. So when should HMRC be allowing new registrations?
There are three precedent cases that HMRC are ignoring, but which are important in the intending trader argument. You will notice that two of these are over 30 years old but still being cited – and there is a very good reason for that. They all represent decided and settled interpretations, so HMRC simply cannot ignore them and invent a new set of rules. They are:
- Rompelman was a 1985 European case involving the intended future let of a part-built Dutch building where the Dutch authorities refused to register and repay VAT on the building construction costs, arguing that the taxpayers had not yet begun to ‘exploit’ the property. You might think this echoes HMRC’s current stance; however, the court ruled in favour of the taxpayers. Essentially, a person is entitled to register and reclaim VAT as soon as he begins a project and can supply evidence of his intention without having to repay any VAT claim if the intended supplies do not go ahead.
- Merseyside Cablevision 1987 case adopted the Rompelman decision with the tribunal deciding that a person can still register and reclaim VAT even if his VATable turnover is below the registration threshold. This then led to UK law being amended albeit with HMRC still being reluctant to allow registrations in case this led to false Phoenix VAT claims.
- Ace Telecom was a 2006 case where HMRC refused a registration from 2004 as the company was not making supplies but intending to do so. HMRC’s rejection was because they were not satisfied with evidence of an intention to trade but the tribunal decided a taxpayer has a statutory right to be registered. Essentially, registration has to be allowed if there are reasonable grounds for believing either taxable supplies will exceed the registration limit or intended to be made.
So what this all means is that HMRC’s policy has to be resisted. There is no argument – HMRC are just plain wrong to refuse intending trader registrations. That said, it is difficult to challenge their interpretation and you may well find yourself being told, as I was, that you’re not being very co-operative. Press home that prior cases show time and again that VAT can be claimed on lead costs while a project is developed and you may well be told that is not HMRC’s policy.
Nevertheless, there can be more than timing at stake. Frequently real money can be withheld, which is why you should not simply accept HMRC’s view on who is entitled to be VAT registered.
This blog is from the ICPA website. The group is dedicated to supporting and promoting the needs of the general accounting practitioner. You can find us at www.icpa.org.uk or email [email protected] or by phone on 0800-074-2896.