In our experience, one of the most troublesome areas of tax for LATCOs is VAT.
VAT is a subject that, by and large, local authorities haven’t had to spend a significant amount of time contemplating thanks to the various exemptions they benefit from. However, the same is not true of a LATCO and, in most cases, those VAT exemptions do not apply.
VAT is a transactional tax and is therefore driven by the nature and in some cases the timing of the transaction. Therefore it is normally very difficult, if not impossible, to change the VAT status of a transaction once it has happened but, with advance planning, it is often possible to improve VAT efficiency.
Common areas where LATCOs have experienced problems recovering VAT include:
- Purchase costs where the activity of the LATCO is deemed to be non-business;
- Costs where the income to which those costs relate is a transaction that is exempt from VAT – for example residential property rental income;
- Situations where the LATCO has no staff of its own but is provided with staff or services by the parent local authority; and
- Residential property developments which were originally intended for re-sale but which ended up being retained and rented out.
With the current rate of VAT at 20%, any leakage is likely to represent a significant additional cost and some of the activities most prone to suffer losses include:
- Property development or rental activities;
- Utilisation of labour resources not related to a LATCOs own employees; and
- Any potentially charitable activities or quasi charitable activities.
Considering the VAT implications of a transaction in advance allows for the correct treatment and ensures that you don’t end up paying more than you should.
Our specialist VAT team offer a blend of technical knowledge and practical commercial problem solving which we have found has been of significant benefit to LATCOs as they are created and develop.
‘Advice before Action’ is always recommended!