Q&A: VAT reclaims on luxury watches

Croner VIP Tax Team. Croner.

In this week’s Q&A, Alex Jones, tax adviser at Croner VIP Tax Team, explains VAT liability when buying and selling luxury watches as an investment.

Q. Can my client reclaim VAT input tax incurred on the purchase of luxury watches they intend to keep for a number of years as an investment?

A. Although the purchase may be made by a VAT registered business, the VAT incurred by a taxable person on a supply to them is only input tax if the goods or services supplied are ‘used, or are to be used, for the purposes of any business carried on or to be carried on by them’.

The first check a VAT registered business should take when considering if they can reclaim input tax for a purchase is whether there is a ‘direct and immediate link’ between the purchase and the taxable supplies to be made by the taxable person.

In this instance, it is purchases being made for investment purposes as opposed to, say, stock for resale.

Passive investment is not considered an economic activity; therefore, the purchase would fail the general input tax principles as set out in HMRC VAT Manual VIT20500.

The question is what happens when the watches are eventually sold.

When a business acquires an asset, it can decide not to include it within its business. This allows the option to leave the goods wholly outside the business and treat them as wholly private or non-business assets. In this scenario, it cannot then recover input tax on the purchase, as per HMRC Manual VIT25220.

This decision has two other important consequences:

(1) No output VAT is then due on the eventual sale, and no input VAT can be recovered on sale costs if the asset is disposed of.

(2) Once a business has made this choice it cannot revisit the VAT that it incurred on the asset, even if the level of business use later increases. The asset has permanently left the VAT system so far as the business is concerned.

Need help with complex tax queries?

Contact the specialist tax advisory and HMRC enquiry service at Croner VIP Tax Team