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More Advanced VAT: Partial Exemption Ian M Harris Leicester City Council VAT & Taxation Advice Office . 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

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more advanced vat partial exemption ian m harris leicester city council vat taxation advice office
More Advanced VAT: Partial Exemption

Ian M Harris

Leicester City Council

VAT & Taxation Advice Office

vat taxation advice office
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
    • Mobile/Text: 07980-339581
    • E-mail: vattax@leicester.gov.uk
taxable supplies
Taxable Supplies
  • A taxable person making taxable (VATable) supplies may recover the VAT incurred in making those supplies
  • Taxable supplies are any supplies made in the course or furtherance of business and liable to a rate of VAT
non taxable supplies
Non-Taxable Supplies
  • Non-taxable (non-VATable) supplies are those:
  • not made in the course or furtherance of business
  • or
  • not liable to a rate of VAT
  • (or not made by a taxable person!)
what supplies are taxable
What Supplies are Taxable?
  • Taxable supplies are:
  • standard-rated supplies
    • VAT at (currently) 15%
  • lower-rated supplies
    • VAT at 5%
  • zero-rated supplies
    • VAT at 0%
what supplies are non taxable
What Supplies are Non-Taxable?
  • Non-taxable supplies are:
  • exempt supplies
  • supplies outside the scope of VAT
  • supplies not in the course or furtherance of business (non-business supplies)
vat on non business supplies
VAT on Non-Business Supplies
  • VAT incurred relating to non-business (and outside the scope) supplies is irrecoverable
  • except for local authorities -

Section 33 of the VAT Act 1994 allows local authorities to recover all VAT incurred even that relating to their non-business supplies

vat on exempt supplies
VAT on Exempt Supplies
  • VAT incurred relating to exempt supplies is irrecoverable
  • unless it is below prescribed de-minimis limits
the de minimis limits
The De-Minimis Limits
  • VAT incurred relating to exempt supplies is recoverable if it is ‘insignificant’
  • Normally less than £7,500pa providing this is less than 50% of all VAT incurred
  • but
  • For a local authority less than 5% of all VAT incurred including that recoverable under Section 33
all or nothing de minimis limits
‘All or Nothing’ De-Minimis Limits
  • Where the de-minimis limit IS NOT breached all VAT is recoverable
  • Where the de-minimis limit IS breached no exempt-attributable VAT is recoverable
  • not just the excess over the de-minimis limit
all or nothing de minimis limits11
‘All or Nothing’ De-Minimis Limits
  • A local authority at 4.9% can recover all VAT incurred
  • A local authority at 5.1% can recover NO exempt-attributable VAT
  • An increase of 0.2 percentage points costs 5.1% of all VAT incurred
  • A cost of £2m-plus for LCC
revised rules for local authorities
Revised Rules for Local Authorities
  • Before 1 April 1997 local authorities could ignore VAT incurred on mixed supplies
  • All local authorities were well below the 5% de-minimis limit
  • then
  • Haringey!
results of the haringey case
Results of the Haringey Case
  • VAT incurred on mixed supplies must be apportioned:
  • that relating to taxable supplies remains recoverable
  • that relating to non-business supplies remains recoverable (under Section 33)
  • that relating to exempt supplies must be counted against the 5% de-minimis limit to see if it is recoverable
results of the haringey case14
Results of the Haringey Case
  • VAT incurred on mixed supplies includes VAT incurred on overheads
  • So the VAT element of recharges relating to exempt supplies must be counted against the 5% de-minimis limit
results of the haringey case15
Results of the Haringey Case
  • All local authorities are now much closer to the 5% de-minimis limit
  • Ever increasing Government initiatives push us ever closer
  • The position needs monitoring closely and regularly
why 5
Why 5%?
  • No statutory basis
  • Customs’ view of ‘insignificant’
  • ‘Any reasonable figure consistently applied’ (Haringey)
  • No possibility of legal challenge
  • But Customs will help if a breach looks likely
the moratorium
The ‘moratorium’
  • Increasing concern at impact of partial exemption on local authorities delivering Government initiatives
  • Therefore Customs launched review
  • Pending outcome of review ‘moratorium for 2007/08 and 2008/09
  • No need to demonstrate below de-minimis limit which ‘assumed’ for all authorities
end of the moratorium
End of the ‘moratorium’
  • Customs’ preferred solution to ease impact of partial exemption on local authorities illegal
  • ‘Moratorium’ also illegal
  • From 1 April 2009 5% de-minimis limit must be strictly applied
  • But Customs still aware of issue and considering other mitigation measures
exempt supplies
Exempt Supplies
  • Exempt supplies are those defined by Schedule 9 of the VAT Act:
  • 1. Land
  • 2. Insurance
  • 3. Postal services
  • 4. Betting, gaming and lotteries
  • 5. Finance
  • 6. Education
  • 7. Health and welfare
exempt supplies contd
Exempt Supplies (Contd)
  • 8. Burial and cremation
  • 9. Subscriptions to trade unions and professional bodies
  • 10. Sports, sports competitions and physical education
  • 11. Works of art, etc
  • 12. Fund-raising events by charities and other qualifying bodies
  • 13. Cultural services
  • 14. Goods on which VAT was irrecoverable
  • 15. Investment gold
the de minimis calculation
The De-Minimis Calculation
  • In order to demonstrate he or she is below the de-minimis limit each taxable person must carry out a de-minimis calculation:
  • 1. VAT directly attributable to exempt supplies is identified
  • 2. VAT attributable to mixed supplies is apportioned with that apportioned to exempt supplies added to 1.
apportioning for mixed supplies
Apportioning for Mixed Supplies
  • The standard apportionment method is an income basis (exempt income as proportion of total income)
  • but
  • Any apportionment method which gives a fair and reasonable attribution to exempt supplies is acceptable
the city council s methodology
The City Council’s Methodology
  • LCC uses a mixture of income based attribution and other methods such as:
  • proportion of area available for let x proportion of time available for let
  • proportion of fee paying clients
  • exempt income as proportion of total budget
exempt income sources
Exempt Income Sources
  • LCC’s methodology identifies the following exempt income sources:
  • leisure centres

- educational classes

  • note leisure centres are subject to an option to tax so room lettings and ‘block-booked’ sports lettings VATable
exempt income sources contd
Exempt Income Sources (Contd)
  • parks
    • hire (non-sports lettings)
    • sport lettings (‘block-bookings’)
  • crematoria
    • cremation fees, etc
  • Fosse Arts Centre
    • room hire
    • educational classes
exempt income sources contd26
Exempt Income Sources (Contd)
  • City Gallery
    • room hire
  • Museums
  • (including The Guildhall and New Walk Museum)
    • room hire
    • cultural shows and events
exempt income sources contd27
Exempt Income Sources (Contd)
  • DeMontfort Hall
    • cultural shows
  • Government funded training
    • TEC Schemes, etc
  • markets
    • stall rentals
exempt income sources contd28
Exempt Income Sources (Contd)
  • schools and community education
    • room hire
    • community education
  • Adult Education College
    • room hire
    • community education
  • libraries
    • room hire
  • Town Hall
    • room hire
exempt income sources contd29
Exempt Income Sources (Contd)
  • commercial properties
    • commercial leases
    • Sales
  • note commercial property sales and leases should all be subject to an option to tax unless there is a pressing business or political reason not to do so
  • remember though some land sales and leases mandatorily exempt, eg buildings for residential or charitable use and land for housing association residential development
exempt income sources contd30
Exempt Income Sources (Contd)
  • capital programme
    • any of the above
  • note capital expenditure is likely to be the biggest threat to the partial exemption de-minimis limit
the current position
The Current Position
  • In 1997/98 LCC was at 4.6%
  • too close for comfort
  • We opted to tax leisure centres and neighbourhood centres
  • We instigated a policy of always opting to tax commercial property leases and sales
  • We amended the attribution methodology for schools and community education
  • Brought figure down to under 3% for 1998/99
the current position32
The Current Position
  • For 2003/04 and 2004/05 ‘leapt’ to 4.7% and 4.85% respectively!
  • But due to BLC and 2005/06 down to ‘normal’ 3.1%
  • HOWEVER THERE IS NO ROOM FOR COMPLACENCY
  • And Council policy is not to exceed 4%
external funding
External Funding
  • The source of funding does not matter if LCC incurs the expenditure and VAT-exempt supplies result
  • lottery funding
  • SRB grant
  • EU grants
  • insurance claims
external funding an example
External Funding: An Example
  • A school wins lottery funding to build a new £9million sports hall
  • LCC will pay £9million plus £1.35million VAT on the construction
  • The sports hall will be used for
    • non-sports lettings
    • ‘block-booked’ sports lettings
    • educational classes
  • Up to 60% - £810,000 - of that VAT could be attributable to exempt supplies
lcc and the 5 de minimis limit
LCC and the 5% De-Minimis Limit
  • LCC has total input VAT of about £41million
  • So 5% is about £2million
  • At 3.2% (latest projection) our leeway is £738,000
  • The £9million sports hall with 60% exempt use would add £810,000 of exempt-attributable input VAT
  • Putting us at almost 5.1%
  • The true cost of the sports hall is £9million plus almost £2.1million in irrecoverable VAT
out sourcing
Out-Sourcing
  • Out-sourcing can be a means of reducing exempt-attributable input VAT
  • but
  • Out-sourcing can also increase exempt-attributable input VAT if the out-sourced service is a cost-component of an exempt supply
other measures if we breach the 5
Other Measures if we Breach the 5%
  • There are very few other measures that can be taken if we breach the 5% de-minimis limit:
  • examine the calculation methodology
    • carry out the calculation in more detail
    • attribute more accurately
    • change the attribution method
  • ensure all input VAT is taken into account
  • seek Customs help
  • challenge Customs
stand the breach
Stand the Breach?
  • Or we could stand the breach
  • and
  • All exempt-attributable input VAT becomes irrecoverable
  • but
  • £2million might be a price worth paying to proceed with a desirable project or development
  • Especially if all such projects or developments can be done in one year
stand the breach39
Stand the Breach?
  • But if we do stand the breach we will want to accurately identify in detail exempt-attributable input VAT to minimise the amount of irrecoverable VAT
  • The administrative burden would be substantial!
your responsibilities
Your Responsibilities
  • Ensure the VAT & Taxation Advice Office know of all VAT-exempt supplies
  • Ensure the VAT & Taxation Advice Office know of any significant changes in VAT-exempt supplies
    • volume or degree of VAT-exempt supplies
    • volume or degree of expenditure relating to VAT-exempt supplies
  • Consult the VAT & Taxation Advice Office about any capital project or major service development where there are or will be VAT-exempt supplies
the vat taxation advice office
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: 0116-247-0689
      • Mobile/Text: 07980-339581
      • E-Mail: vattax@leicester.gov.uk