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UK VAT – avoiding unexpected costs

Helen Wickenden, Assistant Manager, VAT and Customs Duty Services
10/06/2022
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Despite popular belief, we are of the view that no one likes surprises; particularly in relation to unexpected VAT costs. In our experience, some common areas where this can occur are in relation to the restructure of businesses, M&A activity, or in land and buildings transactions.

Transferring a going concern

When selling all or part of the assets of an ongoing business to someone the default position is that the transfers will be subject to VAT. However, where the business being sold is capable of independent operation, and certain other conditions are met, the sale is likely to be a ‘Transfer of a Going Concern’ (“TOGC”) and outside the scope of VAT.  The application of the TOGC rules is a common area of dispute as the specific facts of each transaction have to be considered.

While its good news that VAT may not be chargeable there are additional complications when it comes to leases and property. The question of what constitutes a ‘going concern’ can also be a grey area so seeking advice at an early stage will secure the best deal without any nasty surprises.

When buying a ‘going concern’ – especially if it includes tenanted properties – the complications can result in expensive mistakes. Timing can be crucial and decisions should be made before contracts are concluded – preparation and due diligence is everything. Where applications have to be made to HMRC to satisfy the TOGC conditions (for example for VAT registration or options to tax) then additional time should be factored in as it is often very difficult to expedite obtaining HMRC’s approval/confirmation.

Selling assets

A business that operates commercial vehicles may be seeking to trade them in for more environmentally friendly options or simply refreshing their vehicle fleet. Don’t forget that asset disposal may be subject to VAT. Even if traded as a part payment for the new vehicles VAT may be due on the value of the part exchanged vehicles(s).

Cars (on which VAT was claimed when purchased) are also subject to VAT when sold. If VAT wasn’t recoverable on purchase, the trade buyer is likely to be operating a second-hand margin scheme – a VAT invoice is not appropriate because VAT is accounted for on the profit margin of the onward sale.

Plant and machinery can be a considerable investment, when it is time to upgrade there is often still a residual value to the items being replaced – even if only as scrap metal. Be aware of the part exchange value included in any sale contracts as responsibility to account for the VAT is with the seller.

Buildings and land

If COVID-19 and/or Brexit have prompted a re-think of business needs, there may be an excess of land or buildings. With a national housing shortage, the temptation to repurpose commercial space into flats or to sell land to developers is ever present.

There are many VAT complications with land and property; prepare by establishing a few facts about the property being disposed of. One of the most important pieces of information to know whether the land/property in question has been ‘opted to tax’.

What is an ‘option to tax’?

Ordinarily, the sale of land/buildings is exempt from VAT but this may be undesirable for some businesses as it will restrict the VAT they can recover on costs. To counter this issue VAT law allows a business to ‘opt to tax’ its interest (sometimes referred to as ‘Electing to Waive Exemption’). In doing so the business is usually committed to accounting for VAT on their supplies of the land/building for at least 20 years. It is crucial to keep records and to understand the position and each business with an interest in the land has to make their own option. An option to tax must be notified to HMRC who will usually issue a letter to formally accept the application. Current processing delays at HMRC means that additional time needs to be allowed when making notifications/ applications.

Another key issue to remember is that an option to tax exercised by a member of a VAT group will be likely to impact all members.

What about sub-letting space within offices?

Be it a whole floor or just individual desks, is the proposal to provide reception/management services as well, what about the use of printers, connectivity etc? There has been VAT case-law considering when a business is making a supply subject to the VAT rules for land and when it is making supplies of facilities; with facilities potentially being subject to a different VAT treatment. Understanding the nature of the supplies being made is key to understanding whether VAT will be due.

Is there a lease that is due to end or tenants departing? – the VAT treatment of ‘dilapidations’ and ‘early release’ fees have been the subject of revised HMRC guidance following case-law decisions. We recommend seeking advice on the current rules and how they impact your circumstances.

Buying and selling a business

The sale of existing shares is an exempt supply so VAT recovery on costs will usually be blocked. A frequently high-profile area of VAT dispute is holding company VAT recovery. To be able to reclaim VAT a holding company needs to have an economic activity and make taxable supplies; the passive holding of shares and receipt of dividends does not satisfy these requirements. The VAT incurred in completing a deal can be significant and often businesses’ forecasts are predicated on the fact that VAT will be reclaimed and it subsequently becomes apparent that they are not able to do so.

With all these issues the best time to seek advice is at the planning stage, realistically any time before contracts are signed is better than after. A clear understanding of the VAT implications can make a significant difference to cash flow and the total amount of VAT recoverable.

How we can help

We have an experienced team of VAT and Customs experts, and our global network of specialists means we are equipped to support you both in the UK and beyond.

For more information or to discuss any of the points highlighted in this article, please contact Robert Marchant or Helen Wickenden.

This article first appeared in South East Business. 

Insights

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When it comes to indirect taxes, the food and beverage industry is infamously complex.
Fintechs don’t always appreciate how to calculate the amount of VAT they can reclaim on their operating costs.
HMRC has recently written to businesses regarding upcoming changes to the UK’s customs declarations platform.
Rob Marchant and Ian Worth reflect on how Brexit had impacted businesses and their supply chains and what they may expect to happen next.

Contact us

Robert Marchant
Robert Marchant
Partner, VAT and Customs Duty services
London