Gains dilemma

My client is a limited company that has just sold an investment property for £1 million. The property was a commercial property that was bought brand new by the company in 2003 for £500 000 plus VAT. It was rented out to a number of tenants before being sold as an empty property in February 2008.

When the property was purchased the company claimed input tax for VAT purposes — but never made an option to tax election with HMRC — hence the reason for there being no output tax declared on the selling price.

However this means that the input tax should never have been reclaimed on the property because all supplies in connection with the property were exempt (no VAT was ever charged on the rent).

he problem I now face is that I have based my chargeable gains computation on the base cost of £500...