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VAT Voice by Andrew Needham

Andrew Needham, Director of VAT Solutions (UK) Ltd, points out that HM Revenue & Customs recently provided a reminder on a VAT planning idea to improve business cashflow.In a recent Business Brief (BB 12/05), HMRC kindly reminded us of a useful VAT planning arrangement that can help your cashflow.

Associated companies

HMRC has hardened its policy on associated companies manipulating the VAT return periods in order to obtain a cashflow advantage, but in doing so, inadvertently reminded us of its existence. The basic arrangement is that two or more associated companies that trade with each other arrange their VAT returns in such a way that the purchasing company is able to recover its input VAT before the selling company has to account for the output VAT to HMRC. This provides a perfectly acceptable cashflow advantage to the ‘group’ of companies as a whole.

A more aggressive version of the arrangement is when a company has a reasonable volume of exports or EU sales and sets up a separate ‘export company’ to deal with the exports. The purchases by the parent company are standard rated, but it will have to wait to the end of its VAT quarter to claim back the VAT. By setting up an export company, this company will be making zero-rated sales, so there will be no output VAT to pay. However, it will be purchasing standard rated goods from its parent, and so will be in a position where it will receive regular repayments of VAT. As a repayment trader, the export company will be able to apply for monthly VAT returns and, overall, the two companies will be able to recover the VAT on purchases much quicker than would otherwise be the case, thus obtaining a cashflow advantage.

Discretionary powers

HMRC has decided that it does not like this any more, and will use a discretionary power in Regulation 25 (VAT Regulations 1995) to align VAT periods between the associated businesses, thereby removing the cashflow benefit. It may exercise that power by either withdrawing existing permission for monthly periods or by directing a variation to accounting periods. However, they can only do this from a current date, so until HMRC become aware of the situation, you will continue to benefit from the cashflow advantage. HMRC says it will “exercise this power where there is little or no commercial rationale for the VAT period ‘stagger’ between the associated businesses besides obtaining the cashflow advantage.”

Tip

Ensure that you have a commercial reason for the return cycle as it may discourage HMRC from pursuing the matter further.

Being a poor sport, HMRC point out that where discretionary power is used, businesses will have no right to appeal the matter to the VAT Tribunal. However, if you feel HMRC has used its powers unfairly, you can refer the matter to Judicial Review. HMRC says new guidance is to be issued shortly to staff on how to implement the new policy, and will emphasise the need to exercise the powers in a proportionate manner and to take into account all relevant information. Time will tell if they actually take a light touch, or use a sledgehammer to crack a nut as usual.

Tip

If you feel you can obtain a cashflow advantage from such an arrangement, you can still benefit until such time as HMRC identifies it and takes action to change the VAT return staggers.

October 2005

Andrew Needham
Director, VAT Solutions (UK) Ltd
Email: andrewneedham@vatsolutions-uk.com

VAT Solutions (UK) Ltd
11 Winmarleigh Street,
Warrington,
WA1 1NB

(T) 01925 242497
(F) 01925 242498
(M) 07810 433927
(W) www.vatsolutions-uk.com

VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via the following address: www.vatsolutions-uk.com/newsletter.doc