VAT recovery may be under threat for non-economic activities, says Saffery Champness

Experts at Scottish accountancy firm Saffery Champness have raised concerns that recovery of all VAT on certain non-business activities may be under threat from HMRC as it appears to ignore guidance set out in its own internal manuals.

The issue has emerged with a client being advised by HMRC that policy on recovery of VAT has changed with regard to the Renewable Heat Incentive (RHI) and that, where VAT has been incurred on capital spend which in this case was the biomass boiler, then this should be apportioned.

Under HMRC’s usual approach to compliance visits, all VAT on the boiler would have been able to be recovered on the basis that taxable power was being generated. This is in line with its own guidance on other incentives such as the generation tariff.

Sean McGinness, director - VAT at Saffery Champness and a member of the firm’s Landed Estates and Rural Business Group, said: “There is a lot at stake here, as once again we see HMRC appearing to confuse business income with business activity. If this does however genuinely reflect a change in HMRC policy then there is a danger that they may start to apply the same principle towards an apportionment being made in other areas where grant funding is employed for the purchase of capital equipment and where, under existing rules, all VAT would be recoverable. It would be extremely challenging and a severe blow if such a measure was to be applied to other spend financed in part by similar incentives or grants to the RHI.”