Nogood Boyo: a simple VAT Question

Ronald Raygun wrote:


Selling a business is fine. Transfer of going concern is exempt.
Selling land where you have exercised the option to waive exemption is a different matter.
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Thanks Jonathan. I was working for these people when Mum became ill. They were very kind and checked (as far as they could, as far as anyone can) the IHT planning and I am happy we had the best advice. A couple of days ago I said:
“Choosing a solicitor (or an accountant) is like ordering a tiger for your zoo. You want one that snarls and hisses and prowls and attacks and has sharp teeth. You don't want a meek tiger who says (Nogood Boyo style) "The rules say we've lost so we've lost".”
Here’s your tiger if you need an accountant
Christopher Harden Ltd Chartered Accountants 122A Nelson Road Twickenham TW2 7AY 020 8893 3399
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The transfer of a business as a going concern is not exempt, it is deemed not to be a supply - see the VAT (Special Provisions) Order 1992, Article 5. If it was exempt there'd be no input tax recovery on the associated costs, but we know that it's allowed and there have been court cases which have confirmed this.

True! In this case, however, there are other things that the CA needs to take into consideration. He shouldn't have just said it was a bad idea because of potential future difficulties that he foresaw. If the property were sold to a housing association any option to tax could have been disapplied under the legislation. The CA's answer should have been along the lines of I can foresee potential difficulties, but we need to investigate the detail. That way he has excellent reasons for knocking the idea on the head while still earning a fat fee for his firm;-)
Robert Killington for help with VAT visit www.vatark.co.uk
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I think you may have missed the point as well Robert but you have certainly made my day!
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On Sun, 21 Nov 2004 at 00:17:04 in uk.finance Robert Killington wrote:

There are some important exceptions in 5(2)...
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Nogood Boyo

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Hi Nogood!
That went rather well I think, presumably we all fell into the same trap (Peter excepted). That CA would have held you in the same barely-disguised contempt he held me. Call yourself VAT experts? You don't even consider the long-term repercussions of opting to tax?
Nogood you think "Black" is unambiguous, you would be amazed how many people think Black is very dark Blue, Red or Green. Having established long ago that 89 percent Blue is to all intents and purposes "Black", they are now merrily treating 62 percent Red as "Black" under the benign and approving eyes of the VAT man. Meanwhile you struggle along under your self-imposed restraints.
It's called experience, you can't learn it you can only experience it.
We've gained a bit of experience here and next time we hear a sentence that starts: "I'm thinking of renting out…"
…the alarm bells will go off. We'll be thinking:
"…renting out? I don't like the sound of that! Have we considered calling it something else?"
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Troy Steadman wrote:

Listening to that nonsense, one'd think renting was soon universally to become a thing of the past. How about if we just abolish rents and just let people do what they like on our land, and, provided they keep feeding us off-the-record bribes, we just informally permit them to stay?
For VAT purposes, bribes are zero-rated.
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Your are right, it *shouldnt* but it is. Once you have elected to charge VAT, then you will have to charge VAT on the sale BUT the vat payment may be able to be avoided if the purchaser can show that it will result in an almost immediate reclaim. As you would expect, there are some conditions to fulfil, of course.
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John Boyle

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How does that work? If you buy a piece of land, for say £1M plus VAT and you are going to recover the VAT on it, how do you avoid paying the VAT to the vendor and waiting up to four months to get it back?
Robert Killington
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john boyle wrote:

Can we step back a bit, please?
The original question was "If I rent part of my forecourt to Arthur Daley, should I charge him VAT?", and I wrongly assumed the answer would be "of course not, because there is no VAT on rent".
Now, it seems to me I wasn't really all that wrong at all, because you folks say you *can* charge VAT on rent, but to do so you'd need to exercise an option. Leaving aside the future ramifications issue, this means that unless you exercise the option, then you would not charge VAT, so that is therefore the default position. Hence the short answer "No, don't charge VAT" is not wrong.
What I'd like to know is:
Question 1: Under what circumstances would it be sensible to exercise the exemption waiver option? On the face of it, it would seem utterly daft to do so, since if I want to charge a given net rent, and don't charge VAT, then that given rent is what Arthur will pay, whether or not he's registered. If I do charge him VAT on said given rent, I will get the same as otherwise, and he will pay the same as otherwise if he's registered, but more if not. Who stands to gain here by (apparently) needlessly bringing VAT into an otherwise simple scenario?
Question 2: If we accept that charging VAT is a bad idea in our example, why does Troy say it would be better to disguise the rent as commission? I can only see that it might be because commission is not exempt, but if we're proposing not to charge VAT anyway, then renting would be the way to go, since presumably if charging commission we'd *have to* charge VAT (but doing so would have no waiver implications). But then we're back to question 1, i.e. why would charging VAT be a good idea?
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Ronald Raygun wrote:

The answer is much the same as for the question "I'm below the registration threshold, should I voluntarily register?"
If you opt to tax the rental income, then you can claim the VAT on the expenses associated with it, and also the VAT on the proportion of the general overheads for the whole business apportioned to the rental income (ie you don't have partial exemption to worry about).
If the tenant is VAT registered (eg a car dealer), then they can claim the VAT you charge back, so you can pass the full cost of the VAT on to them. If they are not registered, for example an insurance company or a dentist, then you wouldn't want to opt to tax because you would have to bear the full cost of the VAT charged on the rent.
By calling it something else, we can charge this customer VAT, and claim VAT on expenses, while still keeping our options open for the future.
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Jonathan Bryce wrote:

OK, that makes sense, but it seems a bit theoretical in the pejorative sense of the word, i.e. it doesn't seem likely in practice. If I have a garage which is ticking over nicely, then it doesn't seem likely that there would be a lot of expenses associated with renting a bit of spare ground. Neither would there be likely to be a lot of general overheads unclaimed already. Would there? Might be different if the business is going down the tubes, but in that case de-registration might be on the cards.

Indeed.

Isn't "calling it something else" fraud? A rose by any other name and all that.
Oh rent, rent, wherefore art thou rent? 'Tis but thy name that is my enemy!
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No, because their fed up with being underpaid and abused by the Inland Revenue. they figure they might as well go into private practice, earn a decent fee and still be unappreciated by the Inland Revenue.
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On Sat, 20 Nov 2004 12:22:09 +0000 (UTC), "Troy Steadman"

This is interesting, you have the choice of charging or not charging VAT but there are various considerations before deciding.
It is also more than just a tax issue because it would also be possible to charge rent, commission or a mixture.
Maybe the offer would lead to a further consideration for alternative uses for the land.
An accountant should consider everything not just the question asked.
As Troy says there is no right answer it all depends on the assumptions made.
--
Peter Saxton from London
snipped-for-privacy@petersaxton.co.uk
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Hmm, not seen the full thread, but there are questions, so I'll give my best shot. What do you think?

Yeah, that's true.

Deal with the VAT first. Either the garage sells cars, or maintains them. Either way, it is a taxable supply made by a taxable person. So, VAT is probably an issue. Partial exemption certainly is.
If the property was "opted-to-tax", then a) poor garage!; b) VAT must be charged, because the rent would be, in effect, a taxable supply. If the property was no "opted-to-tax", then rent is an exempt supply, so no VAT is required.
But, hold on a minute, we don't make business decisions based purely upon their tax implications! (if we did, the Revenue would be prosecuting us for tax evasion all the time!) (HMC&E already have, just ask Halifax Building Society!)
This mush who wants to sell cars.... is he competition? Is he a potential business partner? Will he threaten your 10-year plan? Will he enhance your 10-year plan (or even make it happen, something business leaders like to see once in a while, certainly their banks do).
If he's not competition, perhaps he's complementary to your maintenance services. Hmm.... who's got the greatest margin? Y'know, give him a few years, he might be prepared to buy you out of your business and take the lease off your hands..... nice retirement present.
OK, let's assume that he is complementary and is a probable business partner.
But, let's check. Criminal record? CCJs? Insolvent companies? Connections to the mafia?
OK, cleared those checks, let's haggle about rent. I'll start at the higher of the market's square-footage rate, or a portion of my gross margin pro rata floorspace. Plus a 20% markup, don't want to be ripped off now, do I?
Quality, he's signed up for it! Perhaps I should go into the property business instead...
--

mjt


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I think you're going to tumble into the same trap everyone else did.

You did!
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Mmmm... I'm intruiged about the "solution"...!

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mjt


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Have you considered reading the thread?
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I didn't see the "solution" per se, just loads of debate about parts of it.
In message

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mjt


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The word "rent" is in the question and that is why we have all included it in the answer. If you look at a garage forecourt you don't see delimited areas and think to yourself "I wonder who's renting that bit over by the MOT bay?"
So if someone asks you, "I've got this bloke wants to sell cars off my forecourt", you don't instinctively say, "Why don't you rent him that bit over by the MOT bay?" you say "Why don't you charge him commission" – 10% of turnover between £100K and £200K rounded to the nearest £10K or whatever fits the bill.
So the answer is:
"Defer the (potentially) crucial decision as to whether to opt to tax or not until a later date by simply calling it what it is – Commission.
And yes of course it's VAT-able"
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