Re: Vat treatment of a high cost start-up (not for profit)

In message id on Tue, 1 Jul 2003

13:01:21 +0000 (UTC), John Owens wrote in uk.business.accountancy :

We in Woodhouse Eaves are hoping to land some money from emda to put in >broadband. >

>www.rural-WEB covers the background. (acually old background, sorry) > > >One question that has come up is vat and the local vat office cannot >answer, the advice is to make it a 'written question'. We will, but if >there were general pointers that perhaps the enquiry desk failed to think >of it might help me look competent when dealing with the man with the grant >money. > >Year 1 we hope to land £90-£110k in grants and £5 k in subscriptions, and >spend it all. > >Year 2-4 we might have subscriptions and grants coming to £60-90k or as low >as £10-20k, a lot depends on the business model we adopt (i.e. what is >included within what we provide). We won't know for some time which way it >will go. > >Can we register for vat ? Should we register for vat ? > >The lady on the help desk told my colleague that there was a complication >in that we are not aiming to make profits, all income would be ploughed >back in. I found that a strange distinction as we were not talking of >charity status.

As the others have said this is unusual and more details might be necessary.

You mention grants - who is supplying them? If it is Government it may be that VAT exemption may apply and VAT is no longer an issue. Your operating expenses and capital purchases will all go up by the VAT element.

You mention that Yr 2+ income will depend on business model chosen. VAT is a tax on supplies made and thus relates to your source of income. Some income streams have VAT liability, some may not. Some may be exempt, some may be partial exempt. VAT IS complicated but if you don't tell anyone how you plan to make your income, they won't be able to tell you what the VAT implication is.

If the models are very different, VAT may apply in one scenario but not in another. VAT will thus be very relevant and would need to be taken into consideration so that the appropriate model is chosen and cashflows adjusted accordingly.

Reply to
John Blake
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Initially the moeny will come from Govt. as a grant and also some club subscriptions. Costs / Outlay in year 1 exceed £100k.No profit.

In year 2 we 'might' have subscriptions that merely cover bandwidth provision , or we might have higher subscriptions that include ISP services (and possibly more). I am confident that either way there is a taxable supply. I am confident that either way there will be more subscribers year 2 than

  1. However some of our members are concerned that if we register in year 1 (which is clearly advantageous) but then fail to hit vat registration threshold in year 2 then C&E will come gunning for us.

Thanks

-- John Owens

Fax 44 1509 89 08 22

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Reply to
John Owens

That's up the chute.

At any stage you can register/be already registered for VAT. If you look like you will hit the VAT threshold in any quarter you *must* register for VAT.

There is no compulsion to de - register if your turnover falls below the VAT threshold, if that's what you mean, and it could still be advantageous for you to remain VAT registered, even.

You might have some difficulty with HMC&E if you start choosing to register /de-register as the wind blows, claiming back your input VAT on your purchases (of substantial hardware items, say) in the quarters you are VAT registered but not chargeing VAT in the quarters you are not VAT registered.

I don't know the law on this but I'm 100% sure HMC&E have it covered. :-)

DG

Reply to
Derek

When you deregister, you have to pay the VAT on any equipment you have at the time back to them.

Reply to
Jonathan Bryce

That won't be a problem. The only problem is if you register, and then fail to make any taxable supplies at all.

They probably won't let that happen, as they will generally look for evidence that you are making taxable supplies before you get your registration.

Reply to
Jonathan Bryce

"Jonathan Bryce" wrote

VAT on what amount? Eg suppose you bought a computer 4 years ago for £1,000+VAT, ie paid £1,175 and reclaimed £175 input VAT at the time. Say it is now worth "around" £100 (if you're lucky!).

Do you need to pay back the full £175 input VAT when you de-register? Or just 17.5% of "about" £100 (ie perhaps only £17.50 paid back to HMC&E)? If so, how do you determine the current value - or does HMC&E set the amount?

If the former (ie if de-registration requires the full original input VAT to be repaid), then shouldn't you simply SELL the equipment immediately before de-registration - charging VAT of course, eg £100+VAT=£117.50?

Couldn't you buy the equipment yourself, privately, from your business? In which case, you could give yourself a "good deal" (charge a small amount for it)??

Reply to
Tim

You would need to pay £14.89 to HMCE. [The £100 almost certainly includes VAT] You get the value by looking around to see what other people are charging for second hand computers.

Of course if that was the only piece of equipment you had, you wouldn't need to worry as it is below the limit where they start worrying about it.

Reply to
Jonathan Bryce

"John Blake" wrote

If most of the "startup costs" are for equipment that is likely to still be "on hand" in a few months' time, why don't they:

1) Not register for a while (while turnover is less than registration limit); 2) Not charge VAT on early subscriptions, (eg reducing subscription cost); 3) When turnover exceeds registration limit, register; 4) Now recover the input VAT on startup costs (equipment which is still on hand); 5) Only now start charging VAT on the subsequent subscriptions.

This way, they'll still recover the VAT outlay on startup costs (albeit slightly later, but the lost interest on later cashflow could be made up by higher "margin" on early subs, which don't include VAT) and early subscribers can still pay less than if they registered immediately.

[I accept that some startup costs may not be able to be recovered later, eg services received more than 6 months before registration (if there is an amount of these, could simply wait just 6 months before registering) or startup costs on items *not* "still on-hand" at registration date. Still, some delay in registering could be worthwhile?]

Or am I missing something?

Reply to
Tim

"Jonathan Bryce" wrote

Interesting!

What happens if you find that traders are charging (say) £85.11+VAT=£100, but that private sellers are charging (say) £90 with no VAT payable (they are not VAT-registered), then what VAT would be due? [3 possibilities: (a) £14.89; (b) £15.75; (c) £13.40.]

Is it any different if private sellers are charging (say) just £75 (with shops still charging £100 incl.VAT) ? [The 3 possibilities are now: (a) £14.89; (b) £13.13; (c) £11.17.]

[I'm ignoring the fact that the amount are less than £1,000 VAT - eg suppose you actually have other equipment still on hand as well.]
Reply to
Tim

"Peter Saxton" wrote

Well, OK then - why would people pay more to a car dealer for an equivalent second-hand car, than they do from a private seller? [Check out all the car price guides!]

Reply to
Tim

£85.11+VAT=£100,

"Ronald Raygun" wrote

From what Robert says in his post :- ============================================ "Robert Killington" wrote > The value you take is the VAT exclusive value. So a private > seller's value would be VAT exclusive, but it is unlikely > that that would be acceptable to Customs & Excise. ============================================ ... it looks like it should be (a) & (b), yes?

[Private seller's value taken as VAT-*exclusive*, hence any VAT added to this would be option (b) - not (c) - if VAT *did* apply.]
Reply to
Tim

No. If a private seller charges £90, and a private buyer pays £90, that fixes the VAT-exclusive value at £76.60, not £90. The private seller is recovering the same fraction of the VAT he paid for it, as he is recovering of the original VAT-exclusive price paid. Just because the private seller isn't VAT-registered doesn't mean he can't charge VAT, he just can't issue a VAT receipt.

I'm not sure what Robert is on about. In establishing what the true market value of a piece of 2nd hand kit is, you have to take what the typical buyer is prepared to pay for it. The typical buyer of a 2nd hand computer is more likely to be a private individual than a VAT-registered business, and therefore the value would tend to be *expressed in* VAT-inclusive terms. The man in the street might be prepared to pay £100 for it. Then £100 is the VAT-inclusive value, and this then fixes its VAT-exclusive value at £85.11. This is the value you "take" for the purpose of noting in your accounts if you are VAT-registered.

Turning to the seller, if the seller is VAT-registered, he would take the buyer's £100, keep the £85.11, and remit the £14.89 to HMCE, which is fair enough. If he originally paid £1000+VAT for it when it was new, and he reclaimed the VAT from HMCE, he now disposes of it for £85.11+VAT and gives the VAT to HMCE. What's fair is profit is fair in loss.

Now, if the seller is not VAT-registered, he keeps the whole £100, but it is still an item on which the seller, when he acquired it, will have paid VAT, either explicitly or implicitly, so although he now has £100 of real cash, all of which he is allowed to keep, it is still really £85.11 of the computer's intrinsic value, plus £14.89 of VAT. He may have originally paid £1000+£175 for it, and have written off 91.5% of its value while using it, so by selling it for £100, he is in effect recovering 8.5% not only of the £1000 original VAT-exclusive value, but also of the £175 VAT he originally paid.

Reply to
Ronald Raygun

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