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

1. VAT for Managers Ian M Harris Leicester City Council VAT & Taxation Advice Office

2. 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: 0116-255-2443 • E-mail: vattax@leicester.gov.uk

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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)

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

10. VAT Generally - Expenditure • Process all expenditure • through FMIS AP system

11. 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)

12. 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

13. 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

14. 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

15. VAT-Exempt Income • Crucial that partial exemption implications considered if VAT-exempt income generated

16. 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

17. 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!

18. 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

19. 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

20. 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

21. 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

22. 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)

23. Partnership Projects • Generally one of three structures • Each has its own VAT implications

24. 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

25. Partnership with Accountable Body • Individual partners incur expenditure • That partner’s 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)

26. 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

27. 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 body’s VAT regime determines input VAT recovery • local authority - okay • anyone else - unlikely

28. 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’

29. 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’!

30. Other Taxes and Duties • VAT undoubtedly most important • But don’t 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)

31. Other Taxes and Duties • And direct taxes - • NIC’s 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

32. 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!

33. 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: 0116-255-2443 • E-Mail: vattax@leicester.gov.uk