Managing the VAT ‘hit’

The walls may be closing in on tax avoidance but there are still legitimate ways to mitigate the cost of VAT to your business. Some of these focus on good ‘housekeeping’ whereas others require more forward thinking.

VAT claims by non-established businesses

The VAT system has for many years allowed cross border VAT claims to be made by EU and non-EU businesses. The claims process is fairly laborious and this often discourages businesses from making claims with the result either that their profits suffer or their tender prices are relatively high compared with the competition.

The timeframe is tight as claims must be submitted, in the case of EU businesses, no later than 30 September for the 12 months to 31 December and, for non-EU businesses, by 31 December for the 12 months to 30 June. No latitude on these deadlines is allowed so it is prudent to plan early and take professional advice to streamline the process.

Recovering VAT on share acquisition costs

This was a topic in my article for this publication two years ago and in many ways the matter continues to be a challenge for businesses. Readers may know that the BAA litigation concluded early last year in HMRC’s favour with the result that BAA was not entitled to reclaim VAT on the acquisition costs it incurred. Since then, we have seen no official guidance in spite of promises that a Revenue & Customs Brief will be issued.

In the meantime, businesses will need to consider whether they are caught in the same circumstances as BAA or whether they can be distinguished. Drawing on the Court of Appeal’s reasoning in BAA, some of the key points to enable VAT recovery are:

1. The claimant must be engaged in business activities;

2. The costs must be attributable to taxable supplies, e.g. management services, intended to be made by the claimant;

3. The intention to make taxable supplies must have existed at the time the work was instructed;

4. The claimant must actually fulfil its intention to make taxable supplies.

The Court of Appeal placed heavy reliance on documentary evidence in reaching its decision in BAA. One recommendation, therefore, is to document the intentions of the parties as early as possible in the acquisition process.

Forward planning is critical to optimising VAT reliefs and efficiencies. A professional advisor who has visited these issues many times will be able to present you with the best solutions.

VAT on sub-contractor costs

We have recently seen an increase in instances where sub-contractors in the oil and gas sector have added VAT to invoices for services which should not be subject to VAT. Equally there have been some worrying examples where HMRC appear to be giving conflicting advice on whether VAT is due.

The commercial issue where such disputes arise is that invoice payments are delayed causing cash flow difficulties for subcontractors. This can then disrupt work flows for the contractor resulting in costly delays to the job. The VAT aspect can usually be resolved through dialogue but, in our experience, it is far preferable to clarify the VAT position at the outset before any invoices are raised.

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