A VAT registered business may reclaim input VAT on costs it incurs which are related to taxable supplies which it makes, or will make. HMRC won’t allow a business to reclaim VAT if it doesn’t make any vatable sales. However, that position may not be correct in law.
Gravel Road Records Ltd was formed to provide recording and production services to customers in the music business. The company’s shareholders were the director: Mr Townsend, and two external investors: Mr Robinson who became the company sectary, and an unconnected company: Icealarm Ltd.
Gravel Road Records registered for VAT in May 2009 and took on the lease of a commercial building, in order to convert it to a recording studio. It was expected that the conversion work would be completed by January 2010, and two customers committed to use the studio on that basis. In the event the studio was not completed until late 2010, by which time the potential customers had found alternative facilities. Due to the down turn in the music business the company did not attract any further customers, and ceased to trade in 2012.
HMRC cancelled the VAT registration in June 2014, back dated to May 2009, saying that the company never had any intention to make taxable supplies. All input tax claimed since May 2009 was disallowed.
At the tax tribunal Mr Townsend successfully argued that the recording studio venture was not a hobby as it was undertaken in a commercial building, and the external investors expected to see a return on their investment. The tribunal agreed that there was an intention to make taxable supplies, and the claims for input VAT should be allowed. The intention to make supplies was more important than the fact the business venture failed.
Written by the Tax Advice Network