Minimising cost by effective tax management NHF Finance Conference November 2011 What are your main costs? Property improvements Repairs & maintenance Voids & bad debts Developments COSTS Utility collection Feed-in tariffs Overheads Staff 1 1
Development projects overview Current structure Proposed structure Professional service provider Construction services Professional service provider Construction services Services plus 20% VAT Services zero rated Services plus 20% VAT HA Services zero rated Single package of new build services zero rated Dev Co VAT is recoverable by Dev Co on this type of project VAT incurred is not deductible by HA in relation to developments resulting in VAT exempt supplies HA No VAT incurred by HA = VAT saving 2 Developments Dev elopment companies Need to consider: Current projects Demolition and abortive costs Transfer Pricing Funding Construction Industry Scheme Corporation Tax (CT) position in respect of sales SDLT reliefs Other dev elopment points Regardless of whether you have a Development company, any VAT incurred on the acquisition of land for future residential lettings is likely to be a cost. However, a housing association can certify to the vendor of the land that it intends to use the land to construct dwellings and the option to tax will then be disapplied removing the VAT cost. Planning permission is key to any development. HMRC are now more regularly reviewing planning permissions to determine the appropriate VAT treatment. 3 2
Developments - SDLT Scope: Any acquisition of a chargeable land interest Rates of 4% on land purchases over 500k. Chargeable consideration is anything in money or money s w orth New rate of 5% but only on residential purchases over 1m Available Exemptions: Relief for Registered Providers A land transaction under w hich the purchaser is a relevant housing provider is exempt from the charge if: The relevant housing provider is controlled by its tenants The vendor is a qualifying body, or The transaction if funded w ith the assistance of public subsidy. Relevant housing provider = NFPP In addition: A land transaction under w hich the purchaser is a profit-making registered provider of social housing is exempt from the charge if the transaction is funded w ith the assistance of public subsidy. 4 Developments - SDLT Charities relief Sch 8 FA 2003 Purchaser must be a charity if there is a transfer of land to a partnership all partners must be charities. Must intend to hold all, or more than 50% of the property for qualifying charitable purposes either; - For use in furtherance of the charitable purposes of the purchaser or of another charity; or - As an investment from w hich the profits are applied to the charitable purposes of the purchaser. Subject to claw -back if a disqualifying event occurs within 3 years different claw-back rules apply depending on the basis for claiming the relief ie full relief or partial relief. 5 3
Developments - SDLT New relief for multiple residential purchases Previously the rate of SDLT w as based on the aggregate consideration given for all the dw ellings New relief for bulk purchases - SDLT rate is based on the mean consideration i.e. aggregate consideration number of dwellings. Dw elling includes fully and partially built buildings Definition extended in certain circumstances to include undeveloped land w here a build contract for dwellings is included 6 Residential improvements VAT Shelter Is there still scope for VAT recovery, need to consider: Scope of original qualifying improvement w orks Whether w orks performed are still first cycle Whether w orks were required at the time of transfer Other improvement points To the extent that the recipients of improvements are disabled and the w orks are specifically to address their needs then there is likely to be scope for the w orks not to be standard rated The installation of energy efficient products, a common example being insulation, can be subject to the reduced rate w here it is supplied and installed by a single supplier Where improvements are performed to void buildings that you have constructed and the property is sold before it is rented then the VAT incurred could be recoverable 7 4
Repairs & maintenance In-house VAT limited to the VAT incurred on materials and any temporary agency staff Externally managed subsidiary Additional VAT on management service. Aimed at maintaining third party efficiency Joint employment contracts VAT limited to the VAT incurred on materials and any temporary agency staff Joint v entures If the joint venture can be VAT grouped then the VAT should be limited to materials, temporary agency staff and third party management fees Must overcome the Benefits Test to VAT group CT issues to consider dependent on legal nature of JV Prompt payments Discounts for prompt payment can reduce the value that VAT is calculated by reference to even if the prompt payment is not fulfilled Outsourced VAT incurred on the full value of the charge 8 Procurement strategy Strategy VAT is one of many factors that should be considered as part of the procurement strategy but as it can make up to a 20% difference it should be factored in to business plans and decisions Other factors include the vision of an organisation and branding Ideological shift Cost Sharing Exemption The Cost Sharing Exemption (CSE) should provide a framew ork for organisations to come together and pool resources in a more VAT efficient manner w here VAT is introduced into a supply chain because the charge for a service includes the cost of staff Conditions for CSE: Independent group of persons form the Cost Sharing Group (CSG) Members make exempt or non-business supplies The CSG s services are directly necessary for the exempt/non-business activities The services are supplied at cost The exemption w ill not or is not likely to cause a distortion of competition 9 5
Cost sharing exemption A R&M Exempt CSG R&M Exempt R&M Exempt B C 10 Voids & bad debts Voids Many housing associations calculate a rent receivable figure that includes the anticipated rent on all properties Inevitably some properties are not being let because they are voids and require w ork before being re-let. As a result the void income is not generated and therefore shouldn t be included in the housing associations exempt income figure Any other deductions from the rent receivable figure should be review ed Bad debts Where a customer of a housing association does not pay for a supply that w as subject to VAT then from 6 months after the due date the housing association can reverse the VAT declared to HMRC but does not need to adjust the value of its taxable supplies What taxable supplies do you make? Rechargeable repairs? Similarly, w here a housing association does not pay its suppliers w ithin 6 months of the due date it must revisit any VAT recovered 11 6
Utility collection Tenant utilities Most tenants receive their utilities from third party utility providers As housing associations collect money from tenants, some have entered into contracts w ith utility providers to collect amounts ow ed by tenants to the utility providers. The content of the contracts between the utility provider, housing association and tenant w ill be important for determining the appropriate VAT treatment Common options 1. The utility is provided to housing association and then on to tenant: If the supply is metered then the supply to the tenant is likely to be subject to VAT at a low er rate. VAT incurred on the charge from the utility provider may be recoverable If the supply is not metered then the supply to the tenant is likely to follow the rental and w ill be exempt. VAT incurred on the charge from the utility provider is likely to be irrecoverable 2. The housing association purchases the tenant debt to the utility company then current case law and HMRC guidance is contradictory on the treatment, non-business or taxable 3. The housing association collects the debt on the utility providers behalf, w hich is likely to be a taxable supply 12 Staff Temporary agency staff The Agency Workers Directive has been effective from 1 October 2011 Make the users of temporary agency staff more responsible for the rights of w orkers Normally there is VAT on the full value of temporary agency staff Provided the provider of the temporary agency staff is not responsible for performing their payroll then there is scope for the value for VAT purposes is significantly reduced Staff Employees salaries are not subject to VAT With effect from 1 January 2012 salary sacrifice benefits provided to employees are likely to fall w ithin the scope of VAT. Examples include: Childcare vouchers, w hich are normally exempt Cycle to w ork schemes, which are normally subject to VAT Will impact both VAT on purchase and provision of salary sacrifice benefits 13 7
Rent roof space Purchase of PV panels Generation tarif f Export tarif f Supplier Energy operator RP Lease Rent? Install/ maintain Energy Household Free/subsidised energy 14 Buy the equipment Energy operator Supplier Generation and export tarif f s RP (Charitable) Supply / install/ maintain Energy Free/subsidised energy Household 15 8
Introduce SPV Household Energy operator Free/ subsidised energy Supplier Generation and export tarif f s RP Land interest SPV (non-charitable) Supply / install/ maintain 16 Summary check list Objectives What do you w ant to achieve and how w ill the scheme be funded? Is this financially viable? Has the business plan been validated (including tax)? Specifics of your project, i.e. use of in-house DLO, ow nership, domestic/commercial properties, funder consent? Do the legal agreements reflect the intended tax treatment? Corporation tax What is the nature of the income streams? VAT Rent likely to be non taxable in a charitable entity Tariff income risk of tax charge if in a charitable entity JVs structure and funding arrangements to potentially mitigate tax charge What is the liability of the income? Minimise irrecoverable VAT and maximise cash flow 17 9
Overheads and other considerations Overheads Whether VAT is recoverable w ill depend on w hat onw ard activity the cost relates to The next draft of the Partial Exemption Framew ork is in the process of being finalised Other taxes This presentation has focused on VAT and corporation tax but employee taxes and pensions costs should not be ignored Income Changes in funding can affect VAT liability more prescriptive funding may indicate a supply by the housing association rather than the receipt of grant income What is the liability of the income? What costs does it relate to? 18 Tax assurance VAT themes VAT CRM visits and HMRC fishing questions leading to prompted errors VAT accounting is your VAT liability and tax point correct? Dev Co review s LSVT review s People taxes Specialist housing teams are beginning to target the sector Corporate taxes Gift Aid checks e.g. requesting bank statement copies Non-charitable expenditure how is your Charity spending their money? Private Sales HMRC googling developments to gain information on particulars 19 10
% of tax due but not paid 13/12/2011 Tax assurance - Penalties 100% 70% 50-100% 50% 35% 30% 20-70% 35-70% 30-100% Quality of disclosure 20% 10% No penalty 0-30% 15-30% 0% Unprompted Prompted Unprompted Prompted Unprompted Prompted Mistakes Careless inaccuracy Deliberate not concealed Deliberate and concealed 20 Any questions? Presenters: Keith Cardy keith.cardy@kpmg.co.uk Adrian Wills adrian.wills@kpmg.co.uk 11