Mr Majid and Mr Miah formed a partnership, Majid & Miah Properties (MMP). This was registered for VAT on an intending trader basis in January 2010.
MMP had previously acquired a property to refit into an Indian restaurant and in March 2010 they notified HMRC of an option to tax. This meant that any rent received would be taxable for VAT purposes, rather than exempt supplies of land.
Input tax was claimed by MMP throughout the renovation work and a 15-year lease was drawn up in August 2015 for £500 per week, commencing in September 2016. The other party was Mehfil Limited (ML), of which Majid and Miah were directors.
HMRC’s Visit
In July 2016 HMRC visited MMP’s agents and examined the VAT records. Assessments were raised in respect of two potential issues.
Firstly, there were a number of input tax claims that HMRC felt were not valid, totalling £30,446. The invoices were either made out to the builders or ML, or otherwise appeared not to be MMP’s supplies.
Secondly, HMRC noted that the lease had commenced in August 2015 but rent had only been due since September 2016. It believed the discrepancy in the dates was a typo and so approximately 12 months of rent had not been accounted for. This amounted to £8,664 of VAT.
Partial Agreement
MMP disagreed with HMRC regarding the output tax assessment, but only contested part of the input tax figure. They agreed that £17,392 of input tax in fact related to ML, but persisted that the remaining £13,054 related to the refurbishment of the property.
The matter passed to the first tier tribunal (FTT).
Inexperience Causes Issues
The FTT noted that Majid and Miah were relatively inexperienced with regard to managing businesses. It was clear that they had tended not to differentiate between the businesses when they placed orders, considering them to be one and the same.
Several builders were used to complete the necessary refurbishment work and the FTT noted that MMP often paid the supplier direct on behalf of the builder. Despite the fact the subsequent invoices were then made out to the builder, MMP considered the supply to have been made to them and recovered the VAT accordingly.
Rent-Free Period
MMP confirmed there was no typo, they had always intended to give ML a rent-free period from September 2015 to September 2016.
Unfortunately, ML ended up only trading between September 2015 and February 2017. During this time, the restaurant was closed several times, most notably when it flooded but also due to a deterioration in the relationship between Majid and Miah.
The property was then empty until February 2018 when another party moved in.
In short, due to the rent-free period and the poor performance of ML, no rent was actually paid between September 2015 and February 2017.
Evidence Of Trading
HMRC had based its output tax assessment on the assumption that rent had been charged throughout the above period. The first 12 months had been shown to be rent free, but for the remaining period HMRC pointed to a grant claim ML had made suggesting weekly turnover of £6,000–£8,000 – plenty to meet their rent.
The FTT noted that these amounts had been described as “hopeful” by ML; they did not represent actual pre-existing trading levels.
HMRC also apparently did not check if ML was VAT registered, which the FTT pointed out could have been good evidence of turnover levels.
The FTT agreed that MMP had not received any rental payments.
Continuous Supplies
Normally, for continuous supplies, a tax point arises on the earlier of the date an invoice is issued or the date a payment is received. As there were no payments or invoices for MMP, the only relevant tax point is the basic one – in other words when the service was performed.
The first 12 months were rent free, however the six-monthly payments due from September 2016 to February 2017 were liable for VAT. The FTT confirmed that output VAT of £2,166 was therefore due.
Input Tax Reclaims
MMP submitted a detailed schedule of amounts paid and why they felt they should be entitled to recover the related VAT.
The FTT went over these and by and large agreed with HMRC that there was no entitlement to reclaim the input tax.
However, several invoices that were made out to either builders or ML could only have been in respect of supplies made to MMP. In these relatively few instances, the FTT allowed MMP to recover the related input tax, reducing HMRC’s assessment to £27,360.
All in all, the appeal was allowed in part and the amount payable was reduced from £39,110 to £29,526. Perhaps not a win, but nor was it a complete loss.