Startup Capital and VAT

[jezzaaa]

Hi all,

My sister and I have gone halves on buying a small care home. We formed a limited company which owns the home, and we have a 50% stake each. Some questions for the PH experts if I may...before I go to talk to the accountant I like to be somewhat enlightened!

1. Care home fees are not rated for VAT...but we have registered for VAT voluntarily because we want to claim back all VAT on the purchase costs for the home (Conveyancing, insurances, surveys etc) and for all the equipment we've bought to furnish it etc and any ongoing purchases. Is this valid?

2. We are employing builders for refurbishment work to kitchens/bathrooms etc and they are VAT registered. Are we allowed to claim back the VAT on those invoices? We've also instructed an architect to draw up plans to extend the housE and add bedrooms. Can the VAT from architect fees also be reclaimed?

3. My sister and I have put in all the money from personal savings etc. Am I right in thinking that all these funds were effectively a loan from us to the company, and that the company can repay the loans to us, free of taxes out of it's profits, and thereby also avoid CT on it all? This was my understanding from a brief discussion with our solicitors, but he wasn't very clear and said there were some caveats.

Any advice would be most gratefully received.

Many thanks,

Jezza.

[DavidY]

Talk to an accountant about money things (eg CT, etc), talk to solicitos about legal things.

I suggest you get a decent accountant and get some proper advise.

davidy

[Manks]

jezzaaa said:

Hi all,

My sister and I have gone halves on buying a small care home. We formed a limited company which owns the home, and we have a 50% stake each. Some questions for the PH experts if I may...before I go to talk to the accountant I like to be somewhat enlightened!

1. Care home fees are not rated for VAT...but we have registered for VAT voluntarily because we want to claim back all VAT on the purchase costs for the home (Conveyancing, insurances, surveys etc) and for all the equipment we've bought to furnish it etc and any ongoing purchases. Is this valid?

2. We are employing builders for refurbishment work to kitchens/bathrooms etc and they are VAT registered. Are we allowed to claim back the VAT on those invoices? We've also instructed an architect to draw up plans to extend the housE and add bedrooms. Can the VAT from architect fees also be reclaimed?

3. My sister and I have put in all the money from personal savings etc. Am I right in thinking that all these funds were effectively a loan from us to the company, and that the company can repay the loans to us, free of taxes out of it's profits, and thereby also avoid CT on it all? This was my understanding from a brief discussion with our solicitors, but he wasn't very clear and said there were some caveats.

Any advice would be most gratefully received.

Many thanks,

Jezza.

Okay, I am not an accountant, but to thee best of my knowledge:

1. If you don't CHARGE VAT you cannot legitimately register for VAT and reclaim your input VAT. VAT is not chargeable on your rents which means you cannot reclaim your input VAT.

2. Again, not as far as I am aware for the same reasons. Though I think that if the work is increasing the number of dwellings there may be a case for the VAT to be charged at 5%.

3. Yes. The money is a loan to the company and you can claim ineterst on it too, though the ltd company must deduct basic rate tax from interest paid. Yes, you can repay the loan providing the company can support it. In fact it is a good way of not paying yourself a salary and thus avoiding a tax liability.

Manks

Edited by Manks on Wednesday 28th April 08:09

[jezzaaa]

DavidY said:

Talk to an accountant about money things (eg CT, etc), talk to solicitos about legal things.

I suggest you get a decent accountant and get some proper advise.

davidy

Hi David - yes i intend to...I just like to have some general pointers before I go in so I can ask some good questions. I always find PH to be a great source of general knowledge so I can go in half aquainted! Thanks

[jezzaaa]

Manks said:

Okay, I am not an accountant, but to thee best of my knowledge:

1. If you don't CHARGE VAT you cannot legitimately register for VAT and reclaim your input VAT. VAT is not chargeable on your rents which means you cannot reclaim your input VAT.

2. Again, not as far as I am aware for the same reasons. Though I think that if the work is increasing the number of dwellings there may be a case for the VAT to be charged at 5%.

3. Yes. The money is a loan to the company and you can claim ineterst on it too, though the ltd company must deduct basic rate tax from interest paid. Yes, you can repay the loan providing the company can support it. In fact it is a good way of not paying yourself a salary and thus avoiding a tax liability.

Manks

Edited by Manks on Wednesday 28th April 08:09

Hi Manks - many thanks...answers 1+2 I've had different answers from different people. The VAT Registration form actually specifies an option for all/most fees being zero rated...but of course that might be there so they can turn applications down straight away! Answer 3 seems to be a consensus so that's encouraging.

Thanks again,

J.

[Eric Mc]

Make sure you understand the different categories of income on which VAT is NOT applied. There are three specific categories -

Zero Rated
Exempt
Outside the Scope

Which category does care home income fall into?

It is vital to know this as it has a massive bearing on how much VAT on your costs yuou are entitled to reclaim.
The specific rules about reclaiming VAT when you have Exempt Income are outlined under "The Partial Exemption Rules" which are quite complex.

http://customs.hmrc.gov.uk/channelsPortalWebApp/ch...

[Manks]

jezzaaa said:

Manks said:

Okay, I am not an accountant, but to thee best of my knowledge:

1. If you don't CHARGE VAT you cannot legitimately register for VAT and reclaim your input VAT. VAT is not chargeable on your rents which means you cannot reclaim your input VAT.

2. Again, not as far as I am aware for the same reasons. Though I think that if the work is increasing the number of dwellings there may be a case for the VAT to be charged at 5%.

3. Yes. The money is a loan to the company and you can claim ineterst on it too, though the ltd company must deduct basic rate tax from interest paid. Yes, you can repay the loan providing the company can support it. In fact it is a good way of not paying yourself a salary and thus avoiding a tax liability.

Manks

Edited by Manks on Wednesday 28th April 08:09

Hi Manks - many thanks...answers 1+2 I've had different answers from different people. The VAT Registration form actually specifies an option for all/most fees being zero rated...but of course that might be there so they can turn applications down straight away! Answer 3 seems to be a consensus so that's encouraging.

Thanks again,

J.

Be careful. There's a subtle difference between VAT exeempt and zero rated VAT if I recall correctly. But now you are getting into accountant territory. Or you could call HMRC and ask them for an explanation. You will get passed around half a dozen people before you find one that can explain properly, but it will be free. Then get them to confirm it by email, for the avoidance of doubt.

Whilst it is very tempting to register for VAT anyway and see if you can get away with it, don't do it. VAT visits are now pretty much a given, they try to see everyone about every three years. So you may merrily reclaim all your input VAT for three years, get a visit and have to pay back on demand three years worth of input VAT, plus interest, plus penalties. It could send you broke, even if they allow time to pay.

As I mentioned before, depending upon what you are actually doing check at what rate VAT is charged. Converting a dwelling into a greater number of dwellings is charged at 5%, not 17.5%. Listed buildings and a few other things are also charged differently.

Welcome to the world of tax, VAT and accountants, all of them will cost you a lot of money and you won't see a lot in return in my experience.

Manks

[Eric Mc]

VAT visits are never as frequent as three years these days (unless your business activity is in a category they like to keep an eye on). Most of my clients receive a visit once a decade.

Edited by Eric Mc on Wednesday 28th April 09:27

[Manks]

Eric Mc said:

VAT visits are never as frequent as three years these days (unless your business activity is in a category they like to keep an eye on). Most of my clients receive a visit once a decade.

Which makes the situation somewhat more serious doesn't it? If there have been ten full years of incorrectly reclaiming input VAT and then they get pulled...

Manks

[Eric Mc]

Manks said:

Eric Mc said:

VAT visits are never as frequent as three years these days (unless your business activity is in a category they like to keep an eye on). Most of my clients receive a visit once a decade.

Which makes the situation somewhat more serious doesn't it? If there have been ten full years of incorrectly reclaiming input VAT and then they get pulled...

Manks

Quite.

[Eric Mc]

A quick check reveals that Residential Care Home Income is EXEMPT from VAT. This means that the ability to recover VAT on your costs will be extremely limited and will be subject to The Partial Exemption Rules.

Thread very carefully in this area.

Partial Exemption restrictions can prove very costly if you do not adhere to them carefully. I had a client who had to repay over £20,000 VAT becuase they didn't understand the diofference between Zero Rated sales and Exempt sales.

[Manks]

Eric Mc said:

A quick check reveals that Residential Care Home Income is EXEMPT from VAT. This means that the ability to recover VAT on your costs will be extremely limited and will be subject to The Partial Exemption Rules.

Thread very carefully in this area.

Partial Exemption restrictions can prove very costly if you do not adhere to them carefully. I had a client who had to repay over £20,000 VAT becuase they didn't understand the diofference between Zero Rated sales and Exempt sales.

Pah, I laugh at your client's £20k. I had an accountant do something siilar and the liability with interest and penalties was several times that. They don't act for me anymore.

Manks

[Eric Mc]

Manks said:

Eric Mc said:

A quick check reveals that Residential Care Home Income is EXEMPT from VAT. This means that the ability to recover VAT on your costs will be extremely limited and will be subject to The Partial Exemption Rules.

Thread very carefully in this area.

Partial Exemption restrictions can prove very costly if you do not adhere to them carefully. I had a client who had to repay over £20,000 VAT becuase they didn't understand the diofference between Zero Rated sales and Exempt sales.

Pah, I laugh at your client's £20k. I had an accountant do something siilar and the liability with interest and penalties was several times that. They don't act for me anymore.

Manks

It's all relative. For the size of my client, £20,000 (it was 7 years ago) was a major blow. Luckilly, it was nothing to do with me as this was a historical situation which had built up over a couple of years. It was me who pointed out to them that they had been making excessive Input VAT claims. They weren't very happy - and I no longer act for them

[jezzaaa]

Eric Mc said:

Make sure you understand the different categories of income on which VAT is NOT applied. There are three specific categories -

Zero Rated
Exempt
Outside the Scope

Which category does care home income fall into?

It is vital to know this as it has a massive bearing on how much VAT on your costs yuou are entitled to reclaim.
The specific rules about reclaiming VAT when you have Exempt Income are outlined under "The Partial Exemption Rules" which are quite complex.

http://customs.hmrc.gov.uk/channelsPortalWebApp/ch...

Hi Eric - thanks for this advice...as has been said below, we're exempt from VAT for purposes of our sales...and we only make exempt supplies. Would we not therefore be completely exempt rather than partially exempt?

Thanks,
J.

[jezzaaa]

Having just read the link you sent, Eric, I think the answer is not the one I wanted to hear, but was expecting...the calculation to work out what percentage of purchases you can claim back VAT on doesn't work if your taxable supplies are zero! Not surprised, but worth a shot...thanks Eric and everyone else for the advice.

Cheers,
J.

[Eric Mc]

If your Sales are COMPLETELY VAT exempt, then you will not be able to reclaim ANY VAT on your costs.
So, if that is the case, there is probably no point in registering for VAT.

If you WANT to register for VAT and reclaim some VAT on your costs, you can still do so. However, the amount of Input VAT you can get back on your costs is initially restricted by the ratio by which the volume of your VAT Exempt Sales relates to your overall Sales.

An example

100% of your Sales are VAT Exempt
Input VAT reclaim - 100% blocked.

80% of your Sales VAT Exempt but 20% is a mixture of Standard Rated or Zero Rtated
Input VAT reclaim restricted to 20% of the VAT on your costs.


However, there is a "De Miniomis " level where you can claim up to certain fixed amount of Input VAT on your costs irresepective of the ratio between Exempt Sales and VATable Sales. The current De Minimis level of Input VAT reclaim is £625 per month.

Here is what HMRC says (and you can see why VAT is complicated)-

9. The de minimis limit
9.1 What do you mean by the de minimis limit?
The de minimis limit allows you to treat exempt input tax as if it were taxable input tax and recover it in full if the total value (directly attributable plus the exempt proportion of any residual input tax) is less than a prescribed amount.

You must first carry out the steps described in section 3 to work out the amount of your exempt input tax before you can apply the rules in this section.

9.2 What are the de minimis limits?
You can be treated as fully taxable in any tax period or longer period (section 10) if your exempt input tax is not more than:

£625 per month on average; and
half of your total input tax in the relevant period.
Note: 'On average' normally means the average over the tax period or longer period.

9.3 What if my exempt input tax is below the de minimis limits?
If your exempt input tax is below the de minimis limit you can treat all your exempt input tax as taxable input tax and recover it all. If, however, your exempt input tax exceeds the de minimis limit, then none of your exempt input tax can be treated as taxable input tax and you cannot recover it.

If you have a group registration for VAT, the limit applies to the group as a whole. For treatment of divisional registrations see paragraph 12.3.

9.4 Are there any items I should include or exclude?
When applying the de minimis limit you should ignore any input tax due to you or from you as adjustments under the Capital Goods Scheme (paragraph 11.16).

9.5 When do I apply the de minimis limit?
Every time you prepare the figures for your VAT return you must check if your exempt input tax exceeds the de minimis limit.

You will need to reconsider the de minimis limit when you carry out your annual adjustment (section 10). Your adjustment calculation will need to include all exempt input tax incurred in the tax year, regardless of whether it was recovered under the de minimis rule during the tax year.

[Eric Mc]

jezzaaa said:

Having just read the link you sent, Eric, I think the answer is not the one I wanted to hear, but was expecting...the calculation to work out what percentage of purchases you can claim back VAT on doesn't work if your taxable supplies are zero! Not surprised, but worth a shot...thanks Eric and everyone else for the advice.

Cheers,
J.

Do not use the term "Zero" when you really mean "Exempt". In VAT language, they are VERY different and can lead to all sorts of problems if you confuse the two.

[Manks]

jezzaaa said:

Having just read the link you sent, Eric, I think the answer is not the one I wanted to hear, but was expecting...the calculation to work out what percentage of purchases you can claim back VAT on doesn't work if your taxable supplies are zero! Not surprised, but worth a shot...thanks Eric and everyone else for the advice.

Cheers,
J.

You have just found out what it cost me thousands to find out. I am not sure where Eric lives but if you would like to send my share of the remittance to Manks Enterprises, Second Phone Box from the Left, Outside the station, Nottingham

Best of luck with your venture and keep us abreast of your progress (if you still have the energy).

Manks

[Eric Mc]

All the info I gave is feely availble from the HMRC website - if you know where to look and how to cut through the technical gobbledygook.

HMRC expect traders to be able to read and understand this stuff without the need to consult accountants or tax advisers.

Luckily for us professionals, most people read the first few lines of the HMRC text and give up

[jezzaaa]

Eric Mc said:

jezzaaa said:

Having just read the link you sent, Eric, I think the answer is not the one I wanted to hear, but was expecting...the calculation to work out what percentage of purchases you can claim back VAT on doesn't work if your taxable supplies are zero! Not surprised, but worth a shot...thanks Eric and everyone else for the advice.

Cheers,
J.

Do not use the term "Zero" when you really mean "Exempt". In VAT language, they are VERY different and can lead to all sorts of problems if you confuse the two.

No indeed...I meant that the sales of VAT'able goods are zero ... i.e. we don't make any VAT'able sales...but the care home fees are indeed exempt.

Thanks again for the advice from all of you...especially Eric and Manks.

Cheers,
J.