Independent VAT Consultant
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Escaping the VAT net

Neil Warren explains that VAT registration can be avoided in some cases if the organisation can tweak its business model. He shares the tale of a cricket club he recently advised.

7th Jan 2020
Independent VAT Consultant
Columnist
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In the quarter to 30 September 2019, there were 69,000 new VAT registrations in the UK, with 50,000 falling off the radar by deregistering. This surprised me. My experience has been that a general downturn in the economy creates the opposite effect: VAT deregistrations usually exceed registrations.

Perhaps freezing the VAT registration threshold at £85,000 until at least 2022 means that an increased number of businesses and organisations are being sucked into the VAT world? Or is there another way?

Thinking outside the box

I recently dealt with a query from a local cricket club, which was concerned that it would exceed the registration threshold in December and would need to register for VAT on 1 February 2020. Registering for VAT would mean a big hit to the club’s bottom line surplus and also bring them into the sticky wicket of partial exemption.

I discussed the issues with the club treasurer and we came up with two escape routes.

  1. Reorganise catering arrangements

If someone hosts a party or function at the club, they pay a fee to hire the room (exempt from VAT) and also pay the club a separate fee for any catering they want for the event. The club uses the services of a self-employed caterer to supply the food: the caterer invoices the club, with the club applying a 20% mark-up when invoicing the host.

When we discussed the arrangement, it was agreed that there would be no problem if the party host liaised directly with the caterer and agree their own deal. This means the turnover from food is no longer included in the club’s profit and loss account. The supply of catering services is now between the party host and the caterer.

However, to ensure the club gets its share of the cake, it will charge a 20% commission to the caterer, which is taxable income for VAT purposes but 20% is a lot less than 100% of the food cost for the purpose of the registration threshold. It is important that contracts and terms and conditions between the various parties reflect the new arrangement.

  1. VAT exemption for fundraising events

There is a common misunderstanding that the VAT exemption on fundraising events is only available for events organised by charities. That is not correct, because the exemption extends to non-profit making organisations run by voluntary committees such as this cricket club.

The exemption applies to all income earned from an event (ticket sales, auction income, merchandise sales) as long as certain conditions are met.

If any income is exempt from VAT, it is ignored as far as the £85,000 threshold is concerned.

Learning points

The above measures prevented a VAT problem for the cricket club, at least for the next couple of years.

The key message is that a business or organisation should not just accept that VAT registration is always a fait accompli. There may be alternative strategies available to avoid becoming a member of the VAT club. The challenge is to recognise a potential problem in advance and making changes, rather than let the VAT horse escape from its stable and having to frantically chase it up a very steep compliance hill.

Added extra: Holiday escape

I once acted for an architect who used to have a three-week holiday in New Zealand each year because he needed to close his business for this period of time to avoid exceeding the registration threshold.

As all of his customers were private householders, who could not claim input tax, this was a very worthwhile strategy to keep his pricing competitive.

Replies (5)

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By kiwilondon99
09th Jan 2020 09:10

Neil - presumably, your cricket club has no immediate expectations of pavilion development[building extensions]. which could change your current VAT planning [ fundraising - architects/planning design + build] .

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By [email protected]
09th Jan 2020 09:23

Restricting opening hours or days for cafes is a popular way of keeping below the VAT threshold which can be very costly in such a competitive business.

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By C.Y.Nical
09th Jan 2020 09:56

It is always and everywhere an observable phenomenon that an excessive tax rate leads to either evasion, avoidance, or reduced economic activity, and in the end a lower tax revenue. In the case of VAT the principal method of avoidance for small businesses is to simply turn trade away. We are all seeing examples of small businesses doing this to stay below the VAT threshold. If the VAT rate was less this wouldn't happen so much.

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By C.Y.Nical
09th Jan 2020 14:09

This is important:
I was interested in this statement in the article: 'If someone hosts a party or function at the club, they pay a fee to hire the room (exempt from VAT)...' so I did a search.
What I found is that in October 2011 VAT Notice 709/3 'Hotels and holiday accommodation' was updated, and followed by HMRC Brief number 02/1, and that the rule is this; 'where a room.... is supplied for the purposes of catering, whether or not the catering is supplied by the same establishment, the room hire is subject to VAT at the standard rate.'
Is the article correct?

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Replying to C.Y.Nical:
Neil Warren
By Neil Warren
15th Jan 2020 11:09

The issue of what is a land supply or otherwise can often be a grey area and I have agreed to write a separate article on this question for Accounting Web. However, the relevant guidance as far as catering and room hire is concerned is VAT Notice 709/3, para 4.3. The online edition is dated 27 February 20219 so quite recent. This paragraph confirms that catering is only relevant if "you serve substantial refreshments", the reference to "you" being the venue charging for the room. Just hiring out a room for a fee, with the hirer sorting out his own food, is not a supply of catering.

Neil Warren

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