3 April 2020

VAT - going beyond the headlines

The Government has recently announced a "VAT Holiday" for businesses, meaning that the VAT payment due for the periods ended 31 March 2020, 30 April 2020, 31 May 2020 and 30 June 2020 won't now be due until 31 March 2021.

It is, undoubtedly, a welcomed good news story. But it is only chapter one.

Rapid changes to the economy mean that there are other potential VAT pressure points relating to property sales and purchases (can your purchase still be a transfer of a going concern where you pay no VAT?, for example) and potentially surprising VAT charges for landlords and developers (will you have to repay any VAT previously recovered?) that also need to be considered urgently.

These are discussed below, but first, what does the "VAT Holiday" actually mean in practice?

Payments for the period ended 31 March 2020 would ordinarily be due by direct debit or standing order by 7 May 2020, but are now deferred to 31 March 2021, with a lengthy repayment window giving businesses an approximate 11 month breathing space.

This VAT Holiday is automatic (i.e. there is no need for businesses to agree it in advance with HMRC) but only, of course, if you remember to cancel your direct debit/standing order!

As the VAT Holiday is more properly described as a deferral of accounting for VAT to HMRC, businesses will still need to charge and collect VAT on goods and services and commercial landlords will need to continue to charge VAT on rent and property sales. However, rather than accounting for this VAT to HMRC as usual in their monthly or quarterly VAT filings, businesses do not need to make these payments at the normal scheduled times. Do remember that currently this only applies for returns up to and including 30 June 2020 and normal VAT payment obligations are currently due to apply for periods after that; so, don’t forget to file and pay your VAT in the ordinary for periods ending 31 July 2020 onwards.

What about VAT refunds/reclaims?

The Government will still be issuing VAT refunds/reclaims for businesses that spend more on input VAT than they receive in VAT on sales. In the current situation many businesses will find themselves in this position, so now is the time to make sure your VAT compliance is slick, so that you can swiftly submit your VAT reclaim to HMRC and help improve cashflow in the current economic market by quickly accessing that repayment of excess input VAT.

If you think your business will not survive the current shut-down, do not immediately cancel your VAT registration – you need to make sure that you process all your VAT reclaims from HMRC before doing this. If your business continues, but you drop below the VAT de-registration threshold of £83,000, think about putting off de-registration until you've reclaimed all excess input VAT.

Transfer of a going concern

Property owners often recover input VAT on their business costs because they have opted to tax (OTT) their property and charge VAT on their rents. A sale of an opted property subject to a property rental business can, with care, be structured as a transfer of a going concern (TOGC) meaning that the seller doesn’t charge VAT on the sale price and the buyer doesn’t have the cashflow cost of paying this VAT (only to recover it a short while later) and doesn't suffer the extra SDLT cost (because SDLT is paid on the total sum of the purchase price and the VAT charged). A TOGC will only apply where the buyer intends to carry on the same property rental business as the seller previously ran and the contractual documents will usually state that the buyer warrants that it will carry on the property rental business for at least one full rent quarter.

If the current landlord has agreed a rent holiday this should not disrupt the TOGC analysis, but buying a property subject to a sole tenancy where the tenant is in the process of surrendering/exiting his lease might be problematic. A sole tenant surrendering his lease say, a couple of days after completion of the purchase, may indeed fatally disrupt a TOGC. Clauses that have become boilerplate in many purchase agreements will need to be looked at carefully to ensure that they are fit for the current circumstances. It may be possible to argue in these cases that there was a real intention to carry on the property rental business (despite the subsequent lease surrender). This is where proper documentation, contemporaneous record keeping, board minutes and business plans can be so critical.

Potential VAT charges for landlords and developers

A business that intends to make wholly VATable supplies can typically recover all of its business input VAT, and that also applies to expenditure on capital projects. But if, within ten years of fitting out, the building is used for making non-VATable supplies, then there can be a re-capture of part of this recovered VAT under the capital goods scheme. Landlords need to be aware that a change from a café to a charity tenant (which can disapply a landlord's OTT) could be very costly.

Not all VATable supplies are at the standard rate and some property owners make zero rated supplies, i.e. the "sale" on a long lease of new residential apartments which the property owner has constructed. Many developers may be thinking of biding their time and renting out these new developed apartments with the idea of selling them in the future when property prices have recovered. These developers should bear in mind that, without care, this could come at a heavy VAT cost, as VAT previously recovered as allowable input VAT may become repayable. With forethought however, it should be possible to find a solution to this issue.

The VAT Holiday will assist with short term cashflow for businesses that are usually net payers of VAT to HMRC, but it is only a deferral and there are many other VAT issues that need to be considered. It is also hoped that HMRC will once again defer the introduction of the domestic reverse charge as businesses don’t need a new complicated system to understand in these difficult times.

Practical points

  • VAT payments due for the periods ended 31 March 2020, 30 April 2020, 31 May 2020 and 30 June 2020 are not payable until 31 March 2021.
  • If you want to participate in the VAT payment deferral, remember to cancel your direct debit/standing order before the next payment goes out.
  • Do not assume that because your business is not normally entitled to a VAT reclaim, that this will continue to be the case over the next few months. Business have been hard-hit by the coronavirus restrictions and many will see a drop in sales. A VAT reclaim could ease the cashflow burden a little.
  • When buying a property rental business, clearly document your intention in writing to carry on that property rental business. Ensure that this intention is reflected in board minutes, business plans, and so on. Also, check that boilerplates clauses in purchase documents reflect the position.
  • If your use of a building changes, remember there may be VAT consequences.

Elizabeth Small is a Partner and Oliver Claridge is an Associate in our Tax team.

Disclaimer

The current global crisis is evolving rapidly, and the rules and guidance for individuals, companies and other entities to manage its implications are similarly fast moving. Notes such as this may be out of date almost as soon as they are published. If you have any questions prompted by this article or on any other matter relevant to you, please get in touch with your usual contact at Forsters.

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