Output tax due for rental supplies to an associated business

The taxpayer a partnership bought a commercial property registered for VAT and made an option to tax election with HMRC on the building. The partners spent large amounts of money improving the premises so that an associated company could trade as a restaurant. A lease was signed on 6 August 2015 effective from 1 September 2015 providing a weekly rental charge of £500 to the company from the partnership.

HMRC raised an assessment for £8 664 covering the period 1 September 2015 to 31 August 2017 for output tax – no rent was ever charged by the partnership. It raised another assessment for £30 446 on the basis the taxpayer had overclaimed input tax on the partnership returns on expenses that HMRC deemed had been supplied to a different business either the builder used to do the work (who was not VAT registered)...