VAT partial exemption

A business that incurs expenditure on taxable and exempt business activities is termed as partially exempt for VAT purposes. In essence, the business has to make an apportionment between the exempt and chargeable activities using a ‘partial exemption method’. This is required in order to calculate how much input tax is recoverable.

There are a number of partial exemption methods available. The standard method of recovering any remaining input tax is to apply the ratio of the value of taxable supplies to total supplies, subject to the exclusion of certain items which could distort the numbers. The standard method is automatically overridden where it produces a result that differs substantially from one based on the actual allocation of inputs. It is possible to agree a special method with HMRC.

Planning note:

Under certain conditions, the VAT incurred on exempt supplies can be recovered. This is subject, however, to two, parallel de-minimis limits. The tests are met, and VAT can be recovered on exempt supplies, where the total value of exempt input tax:

  • Is under £625 a month (£1,875 a quarter/£7,500 a year); and
  • Is less than half of the total input tax incurred.

If both tests are met the VAT can be recovered. Businesses that are partially exempt, need to complete this calculation on a quarterly and annual basis. Please call if you need help making these calculations.
 

HMRC have confirmed their policy on the VAT partial exemption ‘payback’ rules following a recent High Court decision. This concerned the Community Housing Association (CHA) which won their appeal. HMRC have confirmed that they will not be appealing the decision.

The VAT regulations (109) where the payback rules are contained allow businesses to ‘recover’ input tax on costs which were incurred to make exempt or partly taxable supplies but are then instead used to make taxable or partly taxable supplies. A payback claim cannot be made unless the following three conditions are met:

  • the expenditure in question relates to items or supplies that were not used as originally intended
  • the change of use arises after the end of the partial exemption longer period (if there is one)
  • the change of use results in taxable supplies or both taxable and exempt supplies if the original intention had been to make a wholly exempt supply

In the CHA case, a structure was put in place involving a subsidiary company between CHA and its suppliers. The High Court ultimately ruled that input tax was deductible using the ‘payback rules’ as there were supplies between CHA and its subsidiary.

HMRC have included some final comments in their new business brief as to what constitutes the basic requirements for a supply. HMRC state that the “the recipient of the supply must receive some benefit, he must provide some consideration and the consideration must be paid in return for the benefit…… The mere raising of invoices and passing of funds between companies does not automatically create supplies. Careful analysis may be called for, especially if the companies are close associates.”

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Case Studies

The Tax Man

Minimise the stress of an investigation and make use of our extensive experience in securing best outcome for our clients

Business Valuation in Distress

Take advantage of our impartial and rigorous due diligence procedures

FD in The Cupboard

Our innovative ideas are here to improve your business performance and secure appropriate and cost effective funding

The Tax Man

The Tax Man

A new client was introduced to us via a recommendation with whom we arranged to meet on a regular basis in order to determine a number of changes that we felt were needed to their business structure. The client was at the time operating as a husband and wife partnership. The business was flourishing and had a number of large contracts with big organisations.

At the start of the process they were still heavily immersed in their day to day operations so we can get a full flavour for their ambitions, aspirations and growth plans. We quickly recognised there were sufficient tax savings which can be achieved by changing the structure from a partnership to a corporate entity. We carried out a business valuation and disposed of the goodwill from the old to the new business. Unfortunately, as often is the case with efficient tax planning, HMRC got involved and disputed our valuation.

An HMRC investigation can be a very stressful time for any client, even for those best prepared. However, our client had minimal input in the HMRC communication as we dealt with this professionally behind the scene. As an added benefit, our client could rest on the security that all work was covered by insurance and therefore all costs and time in dealing with this enquiry were covered by the fee protection policy we had put in place.

The initial approach taken by HMRC was very aggressive and they tried to present an argument that there was no goodwill in the business. We challenged HMRC’s view that the goodwill was worthless. After lengthy correspondence and numerous telephone calls, HMRC agreed 100% with our original valuation, which preserved our original tax saving plan for the client. Tax savings on this case where in the region of £75K at the outset, with ongoing savings of £6,000 per annum. We are pleased to add another happy client to our portfolio.

Business Valuation in Distress

Business Valuation in Distress

Selling a business is never an easy process, but when disputes arise, the need for a reliable third party due diligence process is even greater.

Tearle & Carver have extensive understanding of the requirements for remaining objective when managing a potentially difficult company buyout. In one such case, we were approached by the courts to act as independent accountant for an acrimonious business sale in which one partner was exiting the business and selling shares to the other. Given the circumstances, both sides had totally polar views of what their business was worth.

After arranging an initial meeting with the company, we were thorough in ensuring we completed due diligence, validating the figures in the accounting records, carrying out adjustments where appropriate, and drafting a set of reliable management figures within the framework required by the court.

A draft version of the report detailing our findings and conclusions was submitted to both parties, giving them the opportunity to voice any queries or concerns and ensure all relevant factors had been taken into account.

Through this process, we were able to submit a final report to the courts that was both binding and acceptable to both parties, effectively resolving what could otherwise have been a time consuming and costly process for all sides.

FD in The Cupboard

FD in The Cupboard

For smaller companies, it is often not possible or cost effective to pay for a full-time Financial Director.
Many of our clients therefore make use of Tearle & Carver’s extensive expertise to provide the services of an FD as and when required.

In this case, we were approached by the management team of an organisation looking to acquire the existing business via an MBO (Management buy out). Their business plan had proved ineffective for securing funding, and what they needed was financial expertise from someone with a developed understanding of the company’s internal workings.

Tearle & Carver helped deliver the solution our clients were looking through utilising our bank contacts in order to make the MBO viable, while also building a robust business plan and preparing our client for the rigorous vetting process. To help with cash flow issues, we introduced factoring which led to improved cash flow management.

We advised on the appropriate business valuation and structure, and continued to prepare monthly accounts to track profgress once the management were fully in command of all the information they needed to move their business forward.

In order to best assist these clients through the crucial first year of ownership, we attended board meetings on a regular basis, a service that we continue to provide to date.

With our continually developing understanding of their business, this client is able to remain confident that Tearle & Carver can provide any financial support they may need, now and in the future.