When it goes wrong…VAT and Abortive Costs

Aug. 15, 2017, 9:30am

As we all know, life and indeed business doesn’t always turn out the way you plan. When this happens, what is the VAT position on the costs you have incurred which become abortive?

If we use a land and property example for a VAT registered building contractor.  Our contractor is considering the purchase of some land with a view to building new residential dwellings with the intention of selling them when they are complete.   There will be considerable professional expenses incurred in connection with the land purchase and the design of the new build scheme prior to getting the planning permission.  If our contractor recovers input tax on the professional costs, based on the intention to make zero rated sales of the properties, what will happen to that input tax if planning permission is not granted for the scheme?

architects drawingsThe VAT Regulations provide for input tax to be recovered initially based on the intention to make taxable supplies, with the proviso that if that intention changes the initial input tax recovery may need to be adjusted.  If the supplies on which the input tax was recovered will never be used, for example, as in this case, when the potential development opportunity can never be realised because of the lack of planning permission and so the costs are written off, then there will be no adjustment to the input tax initially recovered.

The same principle applies to the recovery of input tax on the preparatory costs of a new business, or a new line of business.  If the intended supplies from the new business would be taxable, then input tax on the preparatory costs would be recoverable against that intention to make taxable supplies.  If the new business or new line of business failed before any supplies were made then that input tax would not need to be adjusted.  However, if the business were to deregister then output tax may need to be accounted for on deregistration on the current market value of any goods on hand at deregistration.  This would apply where the VAT has been recovered on those goods and where VAT on the value would be more than £1000.  There is no requirement to account for output tax on intangible assets held.

If you have a tax query, why not contact us to discuss it. Our team has a wealth of experience and would love to hear from you.

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