VAT: partial exemption method using floor space

HMRC has issued Revenue & Customs Brief 35/2014: Lok 'nStore Group PLC (LnS) decision on calculating deductible VAT.

HMRC has issued Revenue & Customs Brief 35/2014: Lok'nStore Group PLC (LnS) decision on calculating deductible VAT.

The decision was focused on the use of the Partial Exemption Special Method (PESM) and how fair and reasonable it was when compared to the standard method. 

LnS operated self-storage facilities providing standard rated storage and exempt insurance provided to customers who wanted cover. The partial exemption calculation issue was in regard to the recovery of overheads such as construction, maintenance and operational costs.

LnS put in a proposal to amend their partial exemption calculation based on floor space which resulted in an effective input tax recover of 99.98% on overheads. HMRC rejected this on the basis that this method did not result in a more accurate basis than the standard partial exemption method. 

LnS contested this and made an appeal to the First Tier Tribunal (FTT). The FTT based their decision on the AB SKF (C-29/08) where it was concluded that the proposed special method based on floor space was fair and reasonable and better than the standard method, HMRC appealed to the Upper Tribunal (UT).

The AB SKF (C-29/08) decision focused on the ‘cost component price’ and the impact on the overheads on the price of insurance ‘must be very small’. In addition it was shown that the storage area of the buildings were ‘almost exclusively’ used for taxable storage.

HMRC appealed on the basis that the FTT had erred and applied the wrong test in applying the cost component test. The UT agreed with HMRC that the FTT had erred though they were unconvinced that this would result in a different conclusion and HMRC’s appeal was dismissed.

The UT concluded as is normal in these cases that close attention must be paid to individual facts, particularly in understanding and assessing the economic or commercial reality underlying the use of relevant VAT inputs. Though HMRC is not contesting the decision it has not amended its policy on using floor space for a PESM and deem them to normally be appropriate for a retail business.

If you believe that decision has affected your business a retrospective claim can be made in line with VAT Notice 700/45 and in accordance with the standard four year time limit. View VAT Notice 700/45 for details on how to make a claim.