Otter-nonsense? 10 reasons organisations say they don't need a VAT health-check

Probably the first, and most common barrier to engaging a VAT health-check is money.  Not enough budget.  But can you afford not to?

The problem is, VAT is an incredibly complex tax (arguably the most complex of all the taxes).  It is fast paced with copious case law, a wide range of VAT reliefs, special schemes and exemptions.  As a result, it can be a significant financial risk to businesses if they get it wrong, and having the right supporting knowledge can avoid costly mistakes and take advantage of the reliefs which are available.

The great thing about a health-check is that it can be built to meet to your business needs and size.  Perhaps you just want to spend an hour covering the largest income and expenditure streams.  From that, you’ll get an idea about the risk, if any, within the business.

Before saying no to a VAT health-check ask yourself:

• Have you taken reasonable care to ensure your VAT position is accurate?

• Are you certain that you have explored any reliefs, exemptions, special regimes or schemes which apply to you?

• Have you complied with your VAT obligations in full?

• Can you afford to pay the interest and penalties in addition to any VAT due, if you have got the VAT position wrong?

I recently came across a business who had been told by its accountant that it didn't need to register for VAT, because its supplies were exempt.

In fact, her business did not meet the strict conditions of the healthcare exemption, and she had unknowingly breached the 90K VAT registration threshold over a year ago, putting her at risk of penalties.

This happens more often than you might think, because the healthcare (and other) exemptions for VAT are tricky navigate and apply in practice.  The primary purpose of a service must be to protect, maintain and restore the health of an individual in order be VAT exempt healthcare (often, this is where cosmetic procedures trip up).  Not only this, but generally speaking, there is a requirement for the service to be performed by a registered health professional on a statutory register.*

There are many professions where the first condition may be met, for example sports therapists may be performing a massage akin to those delivered by physiotherapists, post sports injury.  This will still not be VAT exempt, if the person performing the service is not a registered health professional.

*For completeness, we highlight that in some circumstances, unregistered professionals can provide care which is VAT exempt where they are directly supervised by a registered health professional, or where the care is provided within a hospital or other state-regulated care setting.

Once an HMRC visit has passed, you might feel like a weight has been lifted from your shoulders and breathe a sigh of relief if no assessment is raised.

Ask Realreed Ltd what they think.... they were visited 11 times by HMRC, across a 24 year period (1990-2014) without ever raising concern that it was exempting the rental income it received for serviced accommodation. HMRC later raised an assessment in February 2019 for £4.8m (covering 2015-2019), because it believed the services accommodation should be liable to VAT at the standard rate.

Realreed Ltd asked the High Court for a judicial review, on the basis it should have a ‘legitimate expectation’ that the supplies were VAT exempt, because HMRC had visited 11 times and not previously raised an issue with the liability.

Unfortunately for Realreed Ltd, VAT is a self-assessing tax, and it is the taxpayer’s responsibility to submit accurate VAT returns and to seek advice where necessary.  In the decision, the judge said, “The fact that [HMRC] do not challenge the taxpayer’s treatment of a particular supply on a particular occasion or occasions is not to be treated as shifting the burden from the taxpayer to HMRC”.

Sure, HMRC do take into account whether an error was deliberate and concealed, deliberate but not concealed or simply careless, and this does impact any penalties which may apply if they discover an error.

However, this isn’t because you are a specific type of organisation, the same applies to all taxpayers.  You don’t get special treatment from HMRC, even if you’re desperately trying to research life-saving medical treatment or helping to keep people off the streets.

In my experience, whilst sometimes I have the unfortunate job of telling organisations they owe money to HMRC in relation to income streams they believed were outside the scope of VAT; being involved regularly and pro-actively means I can also help them to make the most of all the reliefs and special regimes available to organisations like charities, NHS bodies, local authorities, academies, care homes and hospices.

This one is linked to the first reason we shared.  Some businesses may legitimately have taxable sales which are under the VAT registration threshold, or make supplies that are VAT exempt.  This means that looking at sales, there may not be an immediately obvious obligation to register for VAT.

Something which does often get overlooked though, is the requirement to add any reverse charge services received to taxable turnover when considering the need to register for VAT.  This is common for supplies like advertising, as a lot of well-known companies (Facebook/Meta, LinkedIn and Google for example) are established in Ireland for VAT purposes.

Generally speaking, the reverse charge will apply to (non-exempt) services where the supplier is based outside of the UK, the place of supply is the UK, and the customer is a relevant business person.  In short, it puts a requirement on the customer to account for the VAT itself where VAT registered, or to add it to taxable turnover where unregistered.

As an example, a business may have taxable turnover of £85,000 on a rolling 12 month basis, in a particular month. If it then buys in advertising services from Google of £6,000 in the same month, this £6k has to be added to the £85k when considering its obligation to register for VAT.  It will be required to register as a result of breaching the £90k VAT registration threshold, but it is in fact a purchase (of advertising) which has been the tipping point and therefore isn’t always immediately recognised by businesses when looking at their obligation to register.

Property developers – this one is for you.  I stumbled across someone recently who has been developing properties for years, who said exactly this to me.

Whilst there may be no need to register for VAT as a property developer if you are renting residential properties (as the supplies will be VAT exempt), if you are making the ‘first grant of a major interest’ in the property, you are making taxable supplies (albeit zero-rated for VAT purposes).  This can in fact be very beneficial, because you’re entitled to recover input tax (VAT on your costs) to the extent they relate to taxable sales (i.e. zero-rated sales of residential properties).

Not only this, even where you are letting rather than selling properties there may still be a very good reason to ‘think VAT’ when planning your project.  Depending on the specific type of work you have undertaken to a property, you could be entitled to a VAT relief (i.e. a reduction in the amount of VAT you are being charged by your contractor).  When making onward exempt supplies (residential lets) this is even more important as you’ll usually have no entitlement to recover VAT on your costs.

Reducing the amount of VAT being charged on the contractors work to convert a single dwelling into three self-contained flats for example, to 5% rather than 20% VAT could save you £30,000 on a £200k (net) construction project, and help to improve cash-flow if thought about in advance.

Another common reason we stumble across. Whilst VAT may be an area that is highlighted, both statutory and internal audits are not designed to pick up every possible VAT issue.  Statutory audits will consider whether the financial statements give a true and fair view (free of material misstatements), and internal audits are usually scoped out based on risk, and may focus on specific business units, transactions controls etc.

VAT is technically a very complex tax (arguably the most complex of all the taxes).  It is fast-paced with copious case law, a wide range of VAT reliefs, special schemes and exemptions.  As a result, it can be a significant financial risk to businesses if they get it wrong, and having the right supporting knowledge can avoid costly mistakes and take advantage of the reliefs which are available.

For example, if you are making supplies which have been labelled as grant income, you may assume it’s okay to treat it as being outside the scope of VAT.  On closer look, it may become clear that in fact there is something being supplied in return for this grant (i.e. there is a supply taking place).  This could be advertising or sponsorship for example, at a charitable gala dinner you are running.  On the face of it, labelled as ‘grant income’ or ‘donation’, it may appear to be outside the scope of VAT.

Another one where all the VAT specialists start biting their lip.  Companies are separate legal entities from one another, and intercompany supplies (even where no invoice is raised) are generally treated in the same way as transactions between unrelated parties.

For example, you may have a parent company who provides management services and IT for the group of companies.  The proportion of costs relating to a subsidiary may never actually be invoiced, but instead be accounted for via the intercompany accounts.  Often, that ‘feels’ okay, because you’ve balanced the debit and credit from an accounting perspective.  But from a VAT perspective, there has been a supply from the parent to the subsidiary companies (which are separate legal entities).  Without a VAT group in place, there will be an obligation to account for VAT on these types of intercompany charges.  The risk will be increased significantly where one of the entities is not VAT registered or it provides VAT exempt services, because even if VAT were charged on the supply – it wouldn’t be recoverable.

This one tends to apply in sectors where the supply is not explicitly one liability or another, and perhaps there is an element of judgement or subjectivity about which category a supply falls into.  For example, whether something is a single supply (one liability for VAT purposes) or a multiple supply (varying VAT liabilities for different elements).

Whilst it may be frustrating, knowing that a competitor doesn’t charge VAT for example, isn’t sufficient assurance for a business that it is doing the right thing.  There could be other reasons they are not charging VAT, such as being under the required threshold or simply getting it wrong!

A health-check may confirm that not charging VAT on your supply is accurate, but if it doesn’t and the supply is liable to VAT, it’s important to remember that complying with HMRC is not a choice, but in doing so you are mitigating significant financial risk associated with errors and penalties.

I can't tell you how many compliance risks I have spotted because of this one, and opportunities for efficiency that have been missed.

VAT returns being prepared blindly (because they are following the process written 15 years ago by the lady that retired 5 years ago), not obtaining advice on property and construction projects in time to make a difference and creating all sorts of non-MTD compliant calculations outside of the system!  It’s really important to ensure processes are fit for purpose on a regular basis and that opportunities to save money are regularly considered and built into an organisation’s best practices, becoming the ‘norm’.

Please - open your mind to the possibility of errors and inefficiencies for the sake of your future business. We can't always change the past; but being pro-active means you can change how you proceed – as a compliant, VAT efficient business!