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

In message id <bds0n0$g62$> 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.

Sorry all

The link is www.rural-web.org

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
www.GoodViews.co.uk

On Fri, 4 Jul 2003 17:44:53 +0000 (UTC), "John Owens"
<> wrote:

>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.
>

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

Derek wrote:

> 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. :-)

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

John Owens wrote:

> 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.

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.

"Jonathan Bryce" wrote
> When you deregister, you have to pay the VAT on any equipment you have at
> the time back to them.

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)??

In article <be4eel$98$>, NOTJ.O.
(John Owens) wrote:

> Sorry all
>
> The link is www.rural-web.org
>
> 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
> www.GoodViews.co.uk
>
>
>
Thanks for the link that has made it a lot clearer.

It seems to me that the grants are to be used to make the
capital purchases and pay for the infrastructure to be
installed - yes?

If so, I think they will be just that, grants, and probably
not affect your ability to recover VAT. You will be able to
register, thus enabling you to recover the VAT on the set
up costs, and gaining a cash flow advantage. Eventually
this VAT will be paid to C&E by way of the VAT levied on the
subscription charges to the users.

Although you may have trouble with Customs & Excise
understanding that the VAT is fully recoverable because it
relates wholly to taxable supplies (they seem to think that
where the money came from is more important!?), you should
be able to argue your way out of any restriction.

If you register initially, and in year two want to cancel
the registration, you will have to refund VAT on the value
of the items on hand at the time. This value will not be
the book value but the amount you would have to pay to get
similar equipment of the same age and condition. If the
amount of VAT on this would be more than £1000 you have to
pay the VAT to Customs & Excise, if its not you don't have
to refund it:-) This equals a value of about £5700 ex VAT.

You need to think of getting some VAT advice. Have a chat
with the University, they may have an inhouse specialist who
could help without cost. Otherwise, find a local specialist
who can help. The cost will be worth it, honest;-)

Best wishes


Robert Killington
visit www.vatark.co.uk
for help with VAT

To e-mail me please do so via my web site.

Tim 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?

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.

"John Blake" wrote
> If the subscription income is a VATable supply, JO may as well
> register sooner rather than later to recover the VAT outlay on start
> up costs.

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?

"Jonathan Bryce" wrote
> 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.

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.]