The 20% VAT rate has now been introduced, are there opportunities to recover costs?
The 2.5% increase in VAT, which was introduced on 4 January, is expected to bring in approximately £10bn extra revenue to the Treasury at no extra cost. The real cost of course is incurred by the individual in the high street, and businesses that are unable to recover VAT on costs incurred, or have very low VAT recovery rates, such as housing associations.
Many associations have low VAT recovery rates ranging from 1% to around 10%. Recovery rates which are in excess of this are generally as a result of a particular activity being undertaken or possibly a high level of taxable rent income from opted commercial properties. Of course many housing associations do not even bother to recover VAT because the costreward relationship does not make it worthwhile.
It is worthwhile reviewing instructions to accounts staff to ensure invoices are being properly coded and the VAT being charged by the supplier is correct. Often, suppliers will issue an invoice with the standard rate of VAT because it is easier for them to do so (they are no more than collecting agents for HMRC), and 'that's what they did last time'. A quick check may reveal that the incorrect VAT rate has been applied, and if this is not picked up in the accounts department, it is unlikely to be picked up at all, and will have an impact on the bottom line. Do your accounts staff know what supplies should qualify for zero or reduced rate VAT?
This may also be the time for housing associations to review their method for VAT recovery of overhead costs, and those that currently do not make any recovery to re-examine that cost-benefit analysis.
Finally, a number of associations are still considering setting up development companies outside their VAT group to take advantage of the VAT savings on development work that these structures can achieve. There clearly are VAT savings to be made, and certainly in terms of new and future development projects the use of such 'captive' development companies should be considered. However, these associations are also considering novating existing projects where development is already underway to newly established development companies. In these cases we would suggest exercising extreme caution as to the arrangements entered into. HMRC will review such arrangements for projects underway very closely (see Community Housing Association VAT tribunal case) to ensure that there is a legitimate onward supply of goods and services from the housing association to the development company enabling past VAT to be recovered.
Apart from VAT, there are also a number of other issues to consider relating to the novation, including employer arrangements, legal contracts, accounting and direct tax. We think that if the novation of existing contracts starts to happen in a big way, HMRC may well start asking whether the sole reason behind the novation is to avoid VAT, in which case housing associations run the risk of being told the practice is abusive and finding themselves spending time and money in the courts.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.