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

2. 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

3. 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

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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

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

13. 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

14. 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

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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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