In Mr & Mrs Kelly T/A Ludbrook Manor Partnership v HMRC [2017] UKUT 0326, the Upper Tribunal (UT) confirmed that a recharge of construction costs when the taxpayer’s changed their minds about who would run the business did not constitute a supply so no VAT could be recovered.

  • Mr and Mrs Kelly had an exempt partnership providing financial advice.
  • They purchased Ludbrook Manor and lived in the house.
  • The property included old stables outbuildings which were rented out as Furnished holiday Lettings (FHL) .
  • A company was formed to carry out the lettings, despite there being no proprietary interest or licence over the stables. The company registered for VAT as FHL accommodation is a standard rated supply.
  • After some time they decided to move out of the house and let that as well.
  • The company incurred costs on the refurbishment, again there was no licence or legal interest in the house.
  • The taxpayers changed their plans following advice and decided to rent the house through a new partnership which they registered for VAT. This also effectively registered their existing partnership, making them a partially exempt business.
  • They arranged for the company to recharge the new partnership for the works undertaken.
  • They claimed back the VAT on the company’s invoice on their new partnership VAT return.

HMRC refused the claim and the First-Tier Tribunal (FTT) agreed. The UT agreed with the FTT and found in favour of HMRC:

  • The company had procured, paid for, received and used the supplies for its own FHL business.
  • At that time there was no ‘reciprocity of obligation’ between the company and the individuals (or their partnership), as the company did not intend or contemplate the onward supply of services for consideration.
  • In order for there to have been a supply by the company at the time it received the supplies itself, there must have been reciprocity of obligation between the company and the individuals in existence at that time. It could not be introduced retrospectively.
  • The taxpayers had not received a supply:
    • They received no improved house: they already owned it.
    • They received no improvements, as at the time of the works, they were not expecting to give consideration to the company for the supplies.
    • As the taxpayers had received no supply for consideration, no VAT could be recovered.

The issue of the VAT reclaim was more important because the company had become insolvent and had not paid HMRC the VAT due on its supply to the taxpayers. It was therefore conceivable that the taxpayer would end up with VAT recovered and not paid (via their company).

The UT also noted that the invoice raised by the company was not before the performance of the supposed services, nor within 14 days thereof. On that basis, the time of supply was when the services were performed and not the invoice date. At that time, there was in fact no supply.

The taxpayers’ appeal was dismissed.


A classic problem for advisers: moving goalposts. It is very, very difficult to plan ahead when the taxpayer's plans and intentions change. 


Buy-to-lets & VAT

Furnished holiday letting

Registering for VAT

VAT: Land & Property at a glance

VAT: Land & Property (notes)

Partial exemption & input VAT

External links


Mr & Mrs Kelly T/A Ludbrook Manor Partnership v HMRC [2017] UKUT 0326


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