Assuming this is a complete new build, the HMRC guidance is now contained in Notice VAT431NB.
The claim must be submitted within 3 months of the building having been "completed". The Notice says "A building is normally considered to be completed when it has been finished according to its original plans. Where there is doubt, it may be regarded as still being under construction until the date that the local planning authority issues a Certificate of Completion…If you do not have a Completion Certificate yet, we will accept one of the following documents:• a habitation letter from the local authority (in Scotland, a temporary habitation certificate), or• in England and Wales, a VOA: Notice of making a New Entry into the Valuation List, or• in Northern Ireland, a District Valuer’s Certificate of Valuation• in Scotland, a Joint Valuation Board Notice of Tax Banding, or• a letter from your bank or building society saying:‘This is to certify that the.……Bank/Building Society released on…….(date) the last instalment of its loan secured on the building at.……because it then regarded that building as complete.’" From this list you can deduce that the time of completion can vary somewhat depending on circumstances. But "unofficial" habitation by the property owner is not in this list, and in my view should not affect the date of completion. I have for example encountered clients living in the bare shell of the building long before it is anywhere near a proper state of completion or habitation, and that has not stopped them making a successful DIY claim at a much later date. Maybe they should not have been there, but that's another story!
Further thought Just had a further thought - be careful in case the staging of the work is exempt under the cultural services exemption (VAT Act 1994, Schedule 9, Group 13) i.e. if you are an eligible body and granting the right of admission to the performance. That could impact on the input tax recovery of the business element under the partial exemption rules.
Sounds like mixed use Pig of a question Chris and difficult to explore all possibilities in a brief response like this. But in a nutshell I would say that at the time of incurring the expenditure, you have an expectation that this work will be used for both business (presumably all taxable) and non-business purposes. Therefore the normal treatment is to claim a proportion of the input tax commensurate with the degree of expected business/taxable use to which the work will be put. That may be difficult to estimate but make a fair and reasonable stab at it. If you have a genuine intention to stage the work repeatedly in future at paying events and/or maybe produce a CD for sale, for example, you should have a good case for a high degree of taxable use. Otherwise if the work will mainly be performed at non-business events etc your input tax recovery will have to be lower.
I don't think you can defer paying the costs until the work is about to generate some taxable income, and then claim that the costs relate more closely to that income, thus giving you a higher recovery rate. The input tax recovery depends on how the costs are actually used, not necessarily when, and HMRC would suspect manipulation if the payment was deferred in that way.
The input tax should be recoverable at the time it is incurred, and you should decide on the recoverable element at that time, as a once-and-for-all claim. There is no provision for the input tax entitlement to be revisited again each time the work is used. The only exception I think would be if you claimed a proportion but never generated any taxable income from the work, when HMRC might try to disallow your claim.
Reverse charge Seeing that nobody else is brave (or daft) enough to step up to the plate, I will demonstrate my foolhardy qualities by doing so.
I assume the sale of the screenplay to the EU company will constitute the grant of exploitable rights. Hence I believe it will constitute a supply falling within paragraph 1 of Schedule 5 of the VAT Act 1994. Schedule 5 supplies are deemed to take place where the recipient (customer) belongs; provided that if the recipient belongs in the EU, they are receiving the supply in their business capacity. The normal evidence for this is that they can quote their EU VAT registration number to the supplier, who must then add that number to the face of his invoice (which will thus bear his UK VAT number as well as the customer's EU VAT number) .
If that is the case here, then the place of supply will be where the customer belongs - presumably the EU state that issued the VAT number - and the customer is obliged to account for the VAT on the supply using the "reverse charge" mechanism, i.e. in effect they pay the VAT and reclaim it (or as much of it as they are entitled to claim) on their own VAT return. The UK supplier does not charge or account for any VAT, so it is easy from his point of view.
Be careful I don't have any experience of how HMRC would react, because I don't advise clients to buck the system in this way!
But there is surely a risk here, in that the (current) legislation only allows you to correct errors of up to £2,000 by entry on the next return; anything above that should be disclosed separately (regs 34 and 35 of the VAT Regulations 1995).
In other words this is not just a convention, it is a legal requirement. So if you do not correct an error of £9k by separate disclosure, HMRC can say you have not legally disclosed it at all; which still leaves it open for them to "discover" it in future - and hit your client with interest and possible penalty. Followed of course by the risk of your client deciding that he was wrongly advised...
Charities do not have any immunity from either the TOGC or the registration rules. Even if the buyer of your tenant service business is a charity, it will still have a liability to register on the strength of the previous taxable turnover of that business being above the threshold in your hands; and when it takes over the business, it will still have to account for VAT on its taxable charges to tenants - even if that is its only taxable activity alongside its other non-taxable ones.
It could only escape a liability to register if it intends to scale down the business so as to keep it below the (deregistration) threshold in future, and persuades HMRC that it therefore has no obligation or desire to register; in which case, it would need to inform you of that fact and you would duly charge VAT on the sale of the business, because the conditions for VAT-free treatment would not be met. Thus the charity would incur VAT it could not recover. But that might of course be a worse option for it than accepting registration and just charging VAT to the tenants, who are already paying it so would surely not be unduly bothered by having to continue doing so.
I can only offer advice on the VAT aspects of your TOGC. The conditions for the TOGC to be free of VAT are explained at para 2.3 of Notice 700/9 as you rightly note. However I find that para is not quite as clear as it might be on the matter of the liability of the transferee to register for VAT. For the TOGC to be VAT-free the legislation - being the VAT (Special Provisions) Order 1995, (SI 1995/1268) article 5 - says that the transferee must already be, or become as a result of the transfer, a "taxable" person. A taxable person is defined at s.3 of the VAT Act 1994 as a person who is, or is required to be, registered under the Act.
S.49 of the Act also says that where a TOGC takes place, for the purpose of determining whether the transferee is liable to be registered, he shall be treated as having carried on the business before as well as after the transfer.
In other words, where there is a TOGC, for the purpose of deciding whether the buyer is a taxable person and therefore satisfies that condition for the TOGC to be VAT-free, the buyer must count the seller's previous taxable income as if it were his own. Thus, if you already have taxable income above the registration threshold and transfer that business or part of the business to the buyer as a TOGC, the buyer will de facto become a "taxable" person for this purpose. This is more or less covered in para 2.3.4 of the Notice; but as I say, I don't think it is explained clearly.
So if your taxable turnover is already above the threshold you do not need to be concerned as to whether the buyer is already VAT registered, or whether he is going to get registered; that is his problem, not yours. He is still a taxable person whatever he does or fails to do, so you can transfer the assets VAT-free provided all the other conditions are met. If the buyer is not already registered and has done his homework properly, he should be asking you to confirm whether your taxable turnover is above the registration limits (not just whether you are registered; you might have a voluntary registration but be below the threshold, in which case the buyer might not necessarily become a "taxable" person).
One final point: you say the business you are transferring will be the provision of (taxable) support services to your property tenants; but not (if I read your post correctly) the actual interest in the properties, which you will retain i.e. presumably you will continue to receive the rents. If that is correct, then you are only transferring part of your business activities - the taxable part as you point out - so the buyer will need to know the historic turnover of that part alone.
Unfortunately TOMS is not that simple. There is a VAT element, but only on the margin, and the exact VAT element of that will not be known until the annual calculation at the year end -which is a global calculation and not related to individual TOMS supplies. So in simple terms you cannot issue a VAT invoice for a TOMS supply.
However HMRC do recognise that there may be circumstances where a business customer is entitled to a tax invoice, in which case your supplier might be able to exclude the supply from TOMS and issue one - see Notice 709/5/04 para 3.3 (and 4.20) for details.
I don't see any problem here. B can continue to trade unregistered if it wishes. The only way HMRC might challenge the status quo is if they tried to argue that this was disaggregation, i.e. the two businesses are really one and their separation is artificial. But I can't see that argument getting off the ground, given the fact that there have always been two companies which originated independently, and they have only come together through an acquisition. There cannot be separation, artificial or otherwise, if they were never together in the first place.
A VAT group is a possibility, but seems rather pointless if you want to keep B's trade out of the VAT club at least until it is transferred into A. So I think the two companies can continue to "do nothing" without penalty until the transfer.
Why not? Don't see why not, if they set up a new registration. The conditions for the reduced rate concession (reg 55JB of the VAT Regulations 1995) refer only to the start date (of the scheme) falling within one year of the effective date of registration. I can find nothing that refers to any previous registration, hence I think it is only the current registration that is in play.
My answers
Habitation does not mean completion
Assuming this is a complete new build, the HMRC guidance is now contained in Notice VAT431NB.
The claim must be submitted within 3 months of the building having been "completed". The Notice says "A building is normally considered to be completed when it has been finished according to its original plans. Where there is doubt, it may be regarded as still being under construction until the date that the local planning authority issues a Certificate of Completion…If you do not have a Completion Certificate yet, we will accept one of the following documents:• a habitation letter from the local authority (in Scotland, a temporary habitation certificate), or• in England and Wales, a VOA: Notice of making a New Entry into the Valuation List, or• in Northern Ireland, a District Valuer’s Certificate of Valuation• in Scotland, a Joint Valuation Board Notice of Tax Banding, or• a letter from your bank or building society saying:‘This is to certify that the.……Bank/Building Society released on…….(date) the last instalment of its loan secured on the building at.……because it then regarded that building as complete.’" From this list you can deduce that the time of completion can vary somewhat depending on circumstances. But "unofficial" habitation by the property owner is not in this list, and in my view should not affect the date of completion. I have for example encountered clients living in the bare shell of the building long before it is anywhere near a proper state of completion or habitation, and that has not stopped them making a successful DIY claim at a much later date. Maybe they should not have been there, but that's another story!
Further thought
Just had a further thought - be careful in case the staging of the work is exempt under the cultural services exemption (VAT Act 1994, Schedule 9, Group 13) i.e. if you are an eligible body and granting the right of admission to the performance. That could impact on the input tax recovery of the business element under the partial exemption rules.
Sounds like mixed use
Pig of a question Chris and difficult to explore all possibilities in a brief response like this. But in a nutshell I would say that at the time of incurring the expenditure, you have an expectation that this work will be used for both business (presumably all taxable) and non-business purposes. Therefore the normal treatment is to claim a proportion of the input tax commensurate with the degree of expected business/taxable use to which the work will be put. That may be difficult to estimate but make a fair and reasonable stab at it. If you have a genuine intention to stage the work repeatedly in future at paying events and/or maybe produce a CD for sale, for example, you should have a good case for a high degree of taxable use. Otherwise if the work will mainly be performed at non-business events etc your input tax recovery will have to be lower.
I don't think you can defer paying the costs until the work is about to generate some taxable income, and then claim that the costs relate more closely to that income, thus giving you a higher recovery rate. The input tax recovery depends on how the costs are actually used, not necessarily when, and HMRC would suspect manipulation if the payment was deferred in that way.
The input tax should be recoverable at the time it is incurred, and you should decide on the recoverable element at that time, as a once-and-for-all claim. There is no provision for the input tax entitlement to be revisited again each time the work is used. The only exception I think would be if you claimed a proportion but never generated any taxable income from the work, when HMRC might try to disallow your claim.
Reverse charge
Seeing that nobody else is brave (or daft) enough to step up to the plate, I will demonstrate my foolhardy qualities by doing so.
I assume the sale of the screenplay to the EU company will constitute the grant of exploitable rights. Hence I believe it will constitute a supply falling within paragraph 1 of Schedule 5 of the VAT Act 1994. Schedule 5 supplies are deemed to take place where the recipient (customer) belongs; provided that if the recipient belongs in the EU, they are receiving the supply in their business capacity. The normal evidence for this is that they can quote their EU VAT registration number to the supplier, who must then add that number to the face of his invoice (which will thus bear his UK VAT number as well as the customer's EU VAT number) .
If that is the case here, then the place of supply will be where the customer belongs - presumably the EU state that issued the VAT number - and the customer is obliged to account for the VAT on the supply using the "reverse charge" mechanism, i.e. in effect they pay the VAT and reclaim it (or as much of it as they are entitled to claim) on their own VAT return. The UK supplier does not charge or account for any VAT, so it is easy from his point of view.
Be careful
I don't have any experience of how HMRC would react, because I don't advise clients to buck the system in this way!
But there is surely a risk here, in that the (current) legislation only allows you to correct errors of up to £2,000 by entry on the next return; anything above that should be disclosed separately (regs 34 and 35 of the VAT Regulations 1995).
In other words this is not just a convention, it is a legal requirement. So if you do not correct an error of £9k by separate disclosure, HMRC can say you have not legally disclosed it at all; which still leaves it open for them to "discover" it in future - and hit your client with interest and possible penalty. Followed of course by the risk of your client deciding that he was wrongly advised...
Charities still liable
John
Charities do not have any immunity from either the TOGC or the registration rules. Even if the buyer of your tenant service business is a charity, it will still have a liability to register on the strength of the previous taxable turnover of that business being above the threshold in your hands; and when it takes over the business, it will still have to account for VAT on its taxable charges to tenants - even if that is its only taxable activity alongside its other non-taxable ones.
It could only escape a liability to register if it intends to scale down the business so as to keep it below the (deregistration) threshold in future, and persuades HMRC that it therefore has no obligation or desire to register; in which case, it would need to inform you of that fact and you would duly charge VAT on the sale of the business, because the conditions for VAT-free treatment would not be met. Thus the charity would incur VAT it could not recover. But that might of course be a worse option for it than accepting registration and just charging VAT to the tenants, who are already paying it so would surely not be unduly bothered by having to continue doing so.
Your taxable turnover can decide the issue
John
I can only offer advice on the VAT aspects of your TOGC. The conditions for the TOGC to be free of VAT are explained at para 2.3 of Notice 700/9 as you rightly note. However I find that para is not quite as clear as it might be on the matter of the liability of the transferee to register for VAT. For the TOGC to be VAT-free the legislation - being the VAT (Special Provisions) Order 1995, (SI 1995/1268) article 5 - says that the transferee must already be, or become as a result of the transfer, a "taxable" person. A taxable person is defined at s.3 of the VAT Act 1994 as a person who is, or is required to be, registered under the Act.
S.49 of the Act also says that where a TOGC takes place, for the purpose of determining whether the transferee is liable to be registered, he shall be treated as having carried on the business before as well as after the transfer.
In other words, where there is a TOGC, for the purpose of deciding whether the buyer is a taxable person and therefore satisfies that condition for the TOGC to be VAT-free, the buyer must count the seller's previous taxable income as if it were his own. Thus, if you already have taxable income above the registration threshold and transfer that business or part of the business to the buyer as a TOGC, the buyer will de facto become a "taxable" person for this purpose. This is more or less covered in para 2.3.4 of the Notice; but as I say, I don't think it is explained clearly.
So if your taxable turnover is already above the threshold you do not need to be concerned as to whether the buyer is already VAT registered, or whether he is going to get registered; that is his problem, not yours. He is still a taxable person whatever he does or fails to do, so you can transfer the assets VAT-free provided all the other conditions are met. If the buyer is not already registered and has done his homework properly, he should be asking you to confirm whether your taxable turnover is above the registration limits (not just whether you are registered; you might have a voluntary registration but be below the threshold, in which case the buyer might not necessarily become a "taxable" person).
One final point: you say the business you are transferring will be the provision of (taxable) support services to your property tenants; but not (if I read your post correctly) the actual interest in the properties, which you will retain i.e. presumably you will continue to receive the rents. If that is correct, then you are only transferring part of your business activities - the taxable part as you point out - so the buyer will need to know the historic turnover of that part alone.
"It does not work like that"
Jan
Unfortunately TOMS is not that simple. There is a VAT element, but only on the margin, and the exact VAT element of that will not be known until the annual calculation at the year end -which is a global calculation and not related to individual TOMS supplies. So in simple terms you cannot issue a VAT invoice for a TOMS supply.
However HMRC do recognise that there may be circumstances where a business customer is entitled to a tax invoice, in which case your supplier might be able to exclude the supply from TOMS and issue one - see Notice 709/5/04 para 3.3 (and 4.20) for details.
Nothing wrong
Martin
I don't see any problem here. B can continue to trade unregistered if it wishes. The only way HMRC might challenge the status quo is if they tried to argue that this was disaggregation, i.e. the two businesses are really one and their separation is artificial. But I can't see that argument getting off the ground, given the fact that there have always been two companies which originated independently, and they have only come together through an acquisition. There cannot be separation, artificial or otherwise, if they were never together in the first place.
A VAT group is a possibility, but seems rather pointless if you want to keep B's trade out of the VAT club at least until it is transferred into A. So I think the two companies can continue to "do nothing" without penalty until the transfer.
Why not?
Don't see why not, if they set up a new registration. The conditions for the reduced rate concession (reg 55JB of the VAT Regulations 1995) refer only to the start date (of the scheme) falling within one year of the effective date of registration. I can find nothing that refers to any previous registration, hence I think it is only the current registration that is in play.