An interesting case highlights how VAT accounting can became confused when various closely linked but separate businesses trade from the same building, swap goods and make purchases on behalf of each other. It’s an interesting scenario too, involving fish and chips, ice cream and alcohol!
VAT risks associated with family trading
A challenge for tax advisers when there are a number of family-linked businesses trading closely together is to look at the potential VAT risks associated with such arrangements. This usually involves checking that the following two objectives are met:
- input tax is claimed by the correct business on expenses that are directly related to the taxable supplies made by that business; and
- output tax is correctly charged on any goods or services that are supplied from one business to another.
The four businesses
The lovely seaside resort of Swanage has a building on the seafront with four businesses, all trading independently but with close family links:
- A fish and chip take-away kiosk – VAT registered.
- A restaurant selling fish and chips and drinks, including alcohol – VAT registered.
- An ice-cream parlour – not VAT registered.
- Freehold of building – not VAT registered.
Input tax challenges
The VAT case mainly concerned the partnership who operated the kiosk. HMRC disallowed input tax claimed over a three-year period on two categories of expenditure:
- Alcoholic drinks: £20,904 – the VAT officer said these were relevant to the restaurant, not the kiosk.
- Building costs: £12,966 – HMRC claimed was a capital cost relevant to the freeholder/landlord of the building – again, not the kiosk.
The alcohol issue
Evidence was given that the kiosk sold alcohol as well as seafood, so at least some of the input tax claimed related to that business. HMRC was strangely unaware of this fact until the tribunal hearing.
The taxpayers argued that the rest of the input tax was claimable because it related to onward supplies made to the restaurant, which were paid for by supplies of fish and chips made by the restaurant to the kiosk. The tribunal agreed this and separate output tax assessments were therefore needed on these ‘barter’ supplies (which became input tax claims of the other business). Confusing?
The building costs
The tribunal decided that the costs assessed by HMRC were ‘occupant costs’ rather than ‘landlord capital costs’ and that one-third of these costs was relevant to each trading business.
It looks as though the HMRC officer was unclear about the overall trading operation here. The approach should have focused on making sure that neither of the two VAT registered businesses were claiming input tax on costs relevant to the two unregistered businesses. Output tax had not been accounted for on onward supplies to the unregistered businesses, but the VAT officer ‘got bogged down’ worrying about the supplies of alcohol between the kiosk and restaurant.
This is a complex and confusing scenario – and one that you can avoid if you’re involved in a similar situation by simply calling us. We’ll make sure your business paperwork is correct and you pay the VAT you owe and not a penny more. Call us on 020 8530 0720 or email firstname.lastname@example.org to find out more.
You can read the original AccountingWeb article by Neil Warren here.