VAT - Evidence Required - a small misstep can have serious cost ramifications

The right to reclaim input tax is always on the basis: 1.  That the costs incurred were for a taxable business purpose
2.  The business holds evidence to support that position.

Simple Right??

This is straight from AccountingWeb, Jason Croke 30 Nov, 2021

Input tax of £19,000 denied

The case of Mpala Mufwankolo (TC8308) concerns a sole trader who ran a pub in London. He was VAT registered and dutifully reclaimed input tax on the rent for the property. HMRC contended that the rental invoices were addressed to the taxpayer’s wife and that the lease was in her name. 

The taxpayer indicated that the VAT registration should have been a partnership. The taxpayer had queried the VAT registration status in 2013 (having being registered from December 2012) but had not pursued it to a conclusion and so it remained a sole trader registration.

The taxpayer held no invoices in his own name, he was unable to demonstrate that he was acting as a partnership, the lease was in the name of his wife. There was no supply from landlord to sole trader and no supply from his wife to himself as sole trader.

Other evidence?

Often in cases where the business does not hold an invoice addressed to them, HMRC will often accept other forms of evidence to demonstrate that the supply was made to the business. Usually this can be proven by showing purchase orders or a historical audit trail of similar purchases, and certainly proof of payment is required, such as bank statements showing the payment going out to the supplier.

In this case, the wife paid the rent and so the sole trader had no proof that he incurred the costs or even paid them. In the absence of proof that there was a partnership (either in accounting terms or for VAT), there was simply no link between the taxpayer and the supplies being made. Other than the very obvious point that a public house cannot operate without a physical building.

Attention to detail

One can imagine that a husband and wife running a busy pub would split the costs, perhaps the wife had a better credit rating and could obtain the lease, whilst the husband ran the day-to-day trade.

As husband and wife, what is hers is his, and what is his is hers (or so my wife tells me) but VAT is more about the law than the numbers. This case presents a warning to businesses, for them to be very clear with the contractual relationships they enter into, more so if it involves family or friends.

This is an unfortunate case, and I feel genuine sympathy for the taxpayer. The individual is technically not entitled to the VAT for the aforementioned reasons, and he was unable to prove that the rent was his legal burden, notwithstanding the fact the pub could not exist without a property. 

Could this have been fixed?

I don’t think so. The wife could have attempted to opt to tax the property and sub-let to the husband, but you cannot backdate an option to tax. You can seek a belated notification to opt but to achieve that you would have to prove to HMRC that you had always intended to opt to tax and acted as if you had (ie, register for VAT, reclaim input tax on main rent and make a taxable supply of onward rent to the sub-tenant). In this case, with no recharges from wife to husband, it would be impossible to opt to tax the property historically in the name of the wife.

Conclusion

Anything involving property always requires special care and attention with regard VAT. Indeed, this isn’t really a matter of VAT, but of property law.

Often taxpayers blur the lines between themselves and their business, whether a sole trader, partnership or limited company. A sole trader may think that the lease being held by the wife makes good sense, certainly in the context of the trade going under, the property remains ready to take on a new sub-tenant. But here, without the proper legal contracts in place, it left the sole trader with nothing when it came to proving to HMRC he had the right to reclaim input tax.