Considering the VAT implications of alternative service delivery 9th March 2017

Quick VAT overview A supply of goods or services Made by a taxable person In the course of furtherance of business Made in the UK For consideration 1

Quick VAT overview There are 3 positive rates of VAT; Standard – 20% Lower (Reduced rate) – 5% Zero – 0% There are 2 other categories; Exempt Outside the scope (non-business) 1

Quick VAT overview Standard rate – 20% Most supplies of goods and services. Unless…specifically covered by other rates and exceptions. 1

Quick VAT overview Reduced rate – 5%: Common examples include Domestic fuel & power Women’s sanitary products Children’s car seats Specific renovations and residential conversions Contraceptive products Smoking cessation products 1

Quick VAT overview Zero rate – 0%: Common examples include Food (many exceptions) Water & sewerage services Books, newspapers, other printed matter Construction of residential / charitable buildings Transport Drugs, medicines, aids for handicapped Some sales by/to charities Children's clothing and footwear 1

Quick VAT overview Exempt: Common examples include Land Insurance Postal services (if part of universal service obligation) Betting, gaming, lotteries Finance Education Health and welfare Burial and cremation Sport, sports competitions & physical education (local authorities specifically excluded) Fund raising event by charities Cultural services 1

Quick VAT overview Who should register for VAT? Anyone who makes taxable supplies in excess of £83,000 in any 12 month period. (April 2016) 1

Quick VAT overview VAT Recovery: normally determined by supplies made Standard rate (20%) outputs or reduced rate (5%) outputs – input tax is fully recoverable Zero-rate (0%) outputs – input tax is fully recoverable Exempt (0%) outputs – input tax either not recoverable or restricted recovery – partly exempt. Outside the scope (non-business) – not normally recoverable. 1

Local Authorities The common activities undertaken by LA’s are statutory non-business Limited VAT recovery under the normal rules S.33 VAT Act 1994 – refund mechanism Partly exempt – makes both taxable and exempt supplies Special method to determine how much partly recoverable input tax it can reclaim 1

Partial Exemption Methods LAs Others (Standard method) Exempt input tax < 5% of the all VAT incurred in year, including non-business activities. 7 year averaging. Exempt input tax is no more than £625 per month (i.e. £7,500 per annum) on average and no more than 50% of all input tax incurred. 1

Partial Exemption Favourable regime Acceptable planning Risk of breach Tipping points Capital expenditure Exempt activities Property transactions Shrinking LA – shrinking 5% 1

External organisations Unlikely to be a s.33 VATA 94 body – no VAT recovery on non-business activities No favourable partial exemption special method – restricted VAT recovery Ability to register for VAT VAT cost? 1

Alternative service delivery Not new Leisure trusts Housing – LSVT Various alternative delivery models No one size fits all Evolving VAT (& tax) implications - it depends! 1

Alternative service delivery Recent case studies LA Crematorium company Social care planning - CIC LA property trading company Parks and open spaces 1

Case Studies Local Authority crematorium company   Proposal to transfer LA operated crematorium to a wholly owned trading subsidiary Issue - majority exempt income: crematorium fees Key considerations; Lease implications VAT recovery Management fee charges Corporation tax charge 1

Welfare Co (CQC registered) Adult social care Community Interest Company (CIC) Adult social care function spun out of LA control and set up as a CIC CIC initially unable to achieve VAT recovery as it provided exempt state regulated welfare services    Exempt supply LA 1 Welfare Co (CQC registered) Individual VAT on costs: irrecoverable Exempt supply

Two tier company structure implemented - enabling full VAT recovery by the CIC without any detrimental effect on the LA LA now contracts with a non state regulated body and this has been agreed with HMRC.   Welfare Co (CQC registered) LA Exempt supply 1 Sub-contract physical provision Sub Co (not CQC registered) Standard rated supply Individual VAT on costs: recoverable in full or part

LA property trading company Commercial or domestic properties? Exempt rentals Ability to ‘opt to tax’ or dis-applied? VAT recovery New builds - design & build company? 1

Parks and open spaces to a charitable subsidiary LA parks & open spaces transferred to a charity Differing VAT recovery regimes Lease considerations for the LA Grant funding from the LA or contract for services? Income generating activities by the charity – impact on VAT recovery Potential tax reliefs to be considered 1

In summary Changing VAT landscape Different VAT regimes VAT implications dependant on activities and structures Penalties and interest for incorrect VAT treatment Other taxes equally important; corporation tax; stamp duty land tax Seek early advice We can help…! 1