VAT for Managers

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• VAT for Managers
• Ian M Harris
• Leicester City Council
• VAT Taxation Advice Office

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VAT Taxation Advice Office

• Who are we?
• Ian Harris Taxation Officer
• Part of Resources Department
• Financial Services Division
• Where are we?
• Room B2.10, New Walk Centre
• Extension 7470 (0116-252-7470)
• Fax [phone]
• E-mail vattax_at_leicester.gov.uk

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Objectives

• To help managers understand the VAT and tax
  implications that need to be considered when
  making financial decisions
• VAT generally
• Partial exemption
• External funding
• Partnership arrangements
• Other taxes and duties

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Background

• Council policy
• Section 36 of VAT Manual
• CIPFA Standard of Professional Practice on Tax
  Management
• All place clear responsibility on managers to
  take account of VAT and tax implications

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VAT Generally - Income

• Need to correctly identify income
• Correct VAT liability
• At the correct time
• Identify all income
• Including non-monetary consideration
• Barters and part-barters

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VAT Generally - Income

• Income by way of business or non-business
• Non-business if -
• not consideration for a supply
• under a special legal regime with no distortion
  of competition
• Otherwise business and normal VAT rules apply

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VAT Generally - Income

• If business, income must be standard-rated unless
  
• lower-rated - Schedule 7A
• eg certain conversions and renovations
• zero-rated - Schedule 8
• eg certain construction and alteration of
  buildings
• exempt from VAT - Schedule 9
• eg land, education, crematoria, cultural shows,
  etc

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VAT Generally - Income

• Process all income through
• corporate miscellaneous income systems
• Wealden AP (debtors invoicing) system
• Using appropriate VAT codes
• S, L, Z, E, N
• Otherwise contact the VAT and Taxation Advice
  Office
• Especially where non-monetary consideration, ie a
  barter (or part-barter)

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VAT Generally - Expenditure

• Input VAT incurred on expenditure is recoverable
  provided -
• we receive the supply
• we obtain a VAT invoice
• Beware partial exemption though

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VAT Generally - Expenditure

• Process all expenditure
• through FMIS AP system

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VAT Generally - Timing

• Ensure VAT accounted for at right time
• output VAT - earliest of
• time supply made
• time payment (consideration) received
• time VAT invoice issued
• input VAT
• when VAT invoice received
• Use of corporate systems should achieve this
• Otherwise contact the VAT Taxation Advice
  Office
• Especially where non-monetary consideration, ie a
  barter (or part-barter)

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VAT Generally - Barters

• Beware barter transactions
• Two transactions each with own VAT liability
• If both sides VATable exchange VAT invoices
• If both sides not VATable not a problem
• If a mismatch need balancing payment and VAT
  invoice
• Watch timing for barters
• External funding and partnerships projects prone
  to barter transactions

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Partial Exemption

• Input VAT is recoverable if relates to business
  supply liable to a rate of VAT
• standard-rated, lower-rated, zero-rated
• But if not, eg VAT-exempt supplies, input VAT is
  not recoverable
• Unless below de-minimis limit
• Exempt-attributable input VAT less than 5 of all
  input VAT incurred

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Partial Exemption

• De-minimis limit is all or nothing
• 4.9 - okay recover all input VAT (including
  exempt-attributable input VAT)
• 5.1 - partially exempt cannot recover ANY
  exempt-attributable input VAT
• Small increase in exempt-attributable input VAT
  can breach de-minimis limit and make partially
  exempt
• Cost to LCC around 1.75million pa

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VAT-Exempt Income

• Crucial that partial exemption implications
  considered if VAT-exempt income generated

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VAT-Exempt Income

• Sale, lease or letting of land or buildings
  (including room lettings)
• Crematoria (but not cemeteries)
• Cultural events at DeMontfort Hall, New Walk
  Museum, The Guildhall, Newarke Houses, Belgrave
  Hall, Jewry Wall, Abbey Pumping Station
• Education (any structured instruction but not
  statutory education)
• Markets

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Minimising Partial Exemption Impact

• Is income really VAT-exempt
• Opt to tax if land
• though beware blocking rules (residential and
  charitable use
• and disapplication rules where person funding
  development)
• nevertheless policy to opt to tax all commercial
  land deals unless pressing business or political
  reason not to
• also leisure centres, most community sports
  facilities, neighbourhood centres, DeMontfort
  Hall are opted
• Phasing of expenditure (not foolproof!)
• Outsourcing
• More aggressive planning measures!

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External Funding

• Do we incur the expenditure and receive the
  supply?
• We can recover input VAT on expenditure paid for
  using external funding provided -
• we place the order
• we receive the supply
• we obtain a VAT invoice
• we make payment from official funds (augmented by
  the external funding)
• we retain ownership
• particularly we do not pass on to the funder

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External Funding and Partial Exemption 1

• If we do receive the supply and incur the input
  VAT any exempt-attributable input VAT will be
  ours
• It will count towards our 5 de-minimis limit
• The existence of or source of external funding is
  immaterial if the Council receives VAT-exempt
  income

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VAT Liability of External Funding

• If funder receives nothing in return funding is
  outside the scope of VAT
• If funder does receive something in return for
  the funding normal VAT rules apply
• Might need to account for output VAT on funding
  received
• Add 17.5 or lose 7/47ths
• Sponsorship
• Subtle supplies, eg free or discounted use

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External Funding and Partial Exemption 2

• If what is supplied in return for funding is
  VAT-exempt could be severe partial exemption
  implications
• Input VAT incurred on funded expenditure will be
  exempt-attributable
• Take extra care where funding is towards
  expenditure on property which is then leased back
  to funder
• Funding is probably then a lease premium
• And we may not be able to opt to tax

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Opting to Tax and External Funding

• An option to tax is disapplied where
• the project involves spending over 250,000 on
• purchasing a property
• gutting reconstruction or alterations adding at
  least 10 to floor area of property
• refurbishment or restoration of property
• civil engineering works
• and property is sold or leased to third party for
  use other than for VATable business purposes
• and that third party provides funding for the
  development (including a lease premium)

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Partnership Projects

• Generally one of three structures
• Each has its own VAT implications

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Partnership as Separate Legal Entity

• Partnership as separate legal entity
• eg company limited by guarantee
• Unlikely to be able to recover any input VAT
• Making of VATable supplies unlikely
• Private sector partial exemption de-minimis limit
  applies
• 7,500pa exempt-attributable input VAT

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Partnership with Accountable Body

• Individual partners incur expenditure
• That partners VAT regime determines input VAT
  recovery
• local authority - okay
• (generous partial exemption de-minimis, Section
  33)
• Government body, eg NHS trust - restricted
• (special Government regime applies)
• Commercial business - normal rules apply
• Charity - unlikely
• (in both cases, making of VATable supplies
  necessary, 7,500pa partial exemption de-minimis
  limit)

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Partnership with Accountable Body

• Often Council acts as accountable body
• Accountable body merely controls funds
• Ring fenced pot out of which funding made
• Council can also be a partner
• But then outside ring fence
• Or accountable body might acts as agent of
  partner, recovering and charging VAT
• Accountable body does not supply administration
  services to other partners

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Partnership with Lead Body

• Specialised and unusual
• eg pooled budgets partnerships with NHS
• Statutorily or regulatorily nominated lead body
• Lead body incurs all partnership expenditure
• Lead bodys VAT regime determines input VAT
  recovery
• local authority - okay
• anyone else - unlikely

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Supplies Between Partners

• Normal VAT rules apply
• Providing there is consideration for a supply
• Contributions towards expenditure outside scope
  of VAT if contributor gets nothing in return
• But beware who does what for whom
• Legal responsibility for activity undertaken by
  another partner could be outsourcing

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Case Studies

• Recovery of input VAT incurred by partnership
• West Devon Borough Council
• Community centre refurbishment
• External funding to construct building for
  voluntary group
• Major project with VAT-exempt income
• Homework!

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Other Taxes and Duties

• VAT undoubtedly most important
• But dont forget other taxes and duties -
• Insurance Premium Tax (additional insurance
  costs)
• Stamp Duty Land Tax (on land transactions but
  exemption for charities)
• Climate Change Levy (but exemption for charitable
  non-business use)
• Aggregates Levy (on building and construction
  work)
• National Non-Domestic Rates (charitable reliefs)
• Landfill Tax (especially Environmental Bodies
  Credits Scheme funding)

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Other Taxes and Duties

• And direct taxes -
• NICs on staffing costs
• additional staffing costs
• staff seconded to or employed by partnership
• Corporation Tax for private sector bodies
• separately constituted partnerships
• third party partners
• trusts
• outsourcing implications

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Conclusion

• VAT and taxation implications need to be taken
  into account at as early a stage as possible
• If so there are few problems that are insoluble!

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The VAT Taxation Advice Office

• If in doubt contact
• THE VAT TAXATION ADVICE OFFICE
• Room B2.10, New Walk Centre
• Extension 7470
• Direct dialling 0116-252-7470
• Fax [phone]
• E-Mail vattax_at_leicester.gov.uk