More Advanced VAT: Partial Exemption Ian M Harris Leicester City Council VAT & Taxation Advice Office - PowerPoint PPT Presentation

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

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  1. More Advanced VAT: Partial Exemption 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 • Mobile/Text: 07980-339581 • E-mail: vattax@leicester.gov.uk

  3. 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

  4. 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!)

  5. 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%

  6. 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)

  7. 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

  8. VAT on Exempt Supplies • VAT incurred relating to exempt supplies is irrecoverable • unless it is below prescribed de-minimis limits

  9. 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

  10. ‘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

  11. ‘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

  12. 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!

  13. 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

  14. 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

  15. 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

  16. 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

  17. 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

  18. 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

  19. 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

  20. 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

  21. 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.

  22. 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

  23. 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

  24. 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

  25. Exempt Income Sources (Contd) • parks • hire (non-sports lettings) • sport lettings (‘block-bookings’) • crematoria • cremation fees, etc • Fosse Arts Centre • room hire • educational classes

  26. Exempt Income Sources (Contd) • City Gallery • room hire • Museums • (including The Guildhall and New Walk Museum) • room hire • cultural shows and events

  27. Exempt Income Sources (Contd) • DeMontfort Hall • cultural shows • Government funded training • TEC Schemes, etc • markets • stall rentals

  28. 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

  29. 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

  30. 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

  31. 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

  32. 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%

  33. 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

  34. 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

  35. 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

  36. 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

  37. 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

  38. 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

  39. 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!

  40. 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

  41. 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