Case Study 1
1. A sole proprietor owns a property which he rents out. He is VAT registered and had “Opted to Tax” the property. Some years ago, he decided to gift a share of the beneficial ownership in the property to his wife. The gifting of the share in the property meant that he was now, for VAT purposes, designated to be in “partnership” with his wife and the property was deemed to have been “supplied” to the “partnership” at open market value. As such, as the “partnership” had not Opted to Tax at the time of the gift, and could not do so retrospectively, this deemed supply could not be regarded as a transfer of a going concern, which requires the transferee to have Opted to Tax on or before the date of transfer.
Consequently, the “deemed” supply was taxable at the standard rate. The sole proprietorship had not recognised this and not only was VAT due, but potentially penalty and interest charges.
Even worse, as the “partnership” had not Opted to Tax, the property rentals it received were exempt of VAT, meaning that the VAT on the deemed acquisition of the property was potentially wholly irrecoverable!
This just goes to show what can happen as a result of an innocent transaction. VAT is a transaction tax, and any change in ownership can have VAT consequences, which must be considered at the time.
Case Study 2
2. A charity, which is registered for VAT, decided to set up a trading company to deal with the letting of property which the charity owns. The charity had “Opted top Tax” the properties in question.
The charity assumed that the Company would be covered by the Charity’s VAT registration and Options to Tax and did not register the Company separately.
The charity entered into a Service Agreement whereby it appointed the Company as the party who would receive the rents and deal with the management of the properties. The Company charged VAT on the property rentals, as the Charity had previously done.
Unfortunately, the Charity were wrong in both respects. The trading company is a separate legal entity from the charity and must consider its’ own VAT registration position, and whether or not to Opt to Tax.
It was charging VAT when it was not entitled to do so, and the VAT it incurred on running and administration costs could not be recovered as it was not registered and was not entitled to register as it had not “Opted to Tax” in its’ own right.
In addition, there were charges passing both ways between the Charity and the Company for the shared use of staff and facilities, and as the two parties were separate, they constituted taxable supplies upon which VAT should have been charged- but was not.
This problem is not unique to Charities. When a business is re-organised, thought must be given to what affect this will have upon the VAT position of the business as a whole, and whether new legal entities are being created which will need their own VAT position addressed.