Readers’ forum: Has input tax been overclaimed?

One of my clients trades as an estate agent and is partially exempt because they also arrange mortgages and earn a commission. The client recently sold part of the mortgage activity to another agent and it met the TOGC conditions as a ‘part business’ sale ie no VAT was charged. The problem relates to input tax on the professional fees linked to the sale – my client treated them as an overhead cost and therefore partly claimed the VAT as residual input tax.

However is this correct in view of the fact that the fee income was wholly exempt? As a twist to the tale a colleague has suggested that we should have claimed all of the input tax because the proceeds were used to open a new branch of the business which will only generate VATable income ie no exempt sales. My colleague mentioned the...