Forewarned is Forearmed
Although VAT affects most areas of a business and is applied to each individual transaction it is alarming to note that when a business is involved in significant reorganisation, expansion, acquisition or disposal the impact of VAT is often ignored.
By involving Ruffles & Co at the early stages of a project it may be possible to introduce appropriate measures to eliminate, reduce or improve your return on the investment that you are making into that project.
There are many aspects of VAT that need to be considered when embarking upon a project. Failure to do so can carry considerable financial penalties in the form of paying unnecessary amounts of VAT to HMRC, losing the right to recover amounts of VAT from HMRC and other lost opportunities.
Careful planning should be given to:
- Land and property transactions;
- VAT exempt transactions, particularly in the financial and insurance intermediary sector;
- Acquisitions and disposals of businesses or parts thereof; and
- International transactions.
A client of a solicitor purchased a disused public house with the intention of converting it into residential units for renting out. Her intentions were made known to her solicitor and to the vendor of the property and his solicitor.
The vendor had opted to tax his interest in the property. As such he charged VAT on 90% of the value of the sale, (the other 10% being exempt from VAT because it related to the existing residential part of the pub).
The purchaser undertook the conversion, incurring VAT at 5% on the costs. As the building was to be rented out, thus generating VAT exempt income, no VAT input tax was recoverable. The purchaser suffered 17.5% VAT on 90% of the purchase price and 5% VAT on the majority of the conversion costs.
Had the purchaser taken advice beforehand there would have been no VAT to pay at all on the purchase price. Once the purchase price was fixed in a contract it then became impossible to retrospectively undertake the necessary provisions to secure removal of VAT from the purchase price.
Had the purchaser undertaken some VAT planning it would have been possible to recover all of the VAT incurred on the conversion costs with the result that the purchaser would have suffered no VAT at all.