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


John Owens
July 4th 03, 06:44 PM
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

Derek
July 4th 03, 07:55 PM
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

Jonathan Bryce
July 4th 03, 08:40 PM
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.

Jonathan Bryce
July 4th 03, 08:42 PM
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.

Tim
July 4th 03, 08:50 PM
"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)??

Jonathan Bryce
July 4th 03, 11:07 PM
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.

Tim
July 5th 03, 12:08 PM
"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?

Tim
July 5th 03, 12:29 PM
"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.]

Tim
July 6th 03, 09:55 AM
> "Tim" wrote:
> >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

"Peter Saxton" wrote
> If you can see what people are charging why would anyone pay more than
> 90 pounds

Well, OK then - why would people pay more to a car dealer for an equivalent
second-hand car, than they do from a private seller?
[Check out all the car price guides!]

Tim
July 6th 03, 10:00 AM
> Tim wrote:
> > 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.]

"Ronald Raygun" wrote
> No. Two possibilities, (a) and (c).

From what Robert says in his post :-
=============================================
"Robert Killington" wrote
> The value you take is the VAT exclusive value. So a private
> seller's value would be VAT exclusive, but it is unlikely
> that that would be acceptable to Customs & Excise.
=============================================

.... it looks like it should be (a) & (b), yes?

[Private seller's value taken as VAT-*exclusive*, hence any VAT added to
this would be option (b) - not (c) - if VAT *did* apply.]

Ronald Raygun
July 6th 03, 11:19 AM
Tim wrote:

>> Tim wrote:
>> > 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.]
>
> "Ronald Raygun" wrote
>> No. Two possibilities, (a) and (c).
>
> From what Robert says in his post :-
> =============================================
> "Robert Killington" wrote
> > The value you take is the VAT exclusive value. So a private
> > seller's value would be VAT exclusive, but it is unlikely
> > that that would be acceptable to Customs & Excise.
> =============================================
>
> ... it looks like it should be (a) & (b), yes?

No. If a private seller charges £90, and a private buyer pays £90,
that fixes the VAT-exclusive value at £76.60, not £90. The private
seller is recovering the same fraction of the VAT he paid for it,
as he is recovering of the original VAT-exclusive price paid. Just
because the private seller isn't VAT-registered doesn't mean he
can't charge VAT, he just can't issue a VAT receipt.

> [Private seller's value taken as VAT-*exclusive*, hence any VAT added to
> this would be option (b) - not (c) - if VAT *did* apply.]

I'm not sure what Robert is on about. In establishing what the
true market value of a piece of 2nd hand kit is, you have to take
what the typical buyer is prepared to pay for it. The typical buyer
of a 2nd hand computer is more likely to be a private individual
than a VAT-registered business, and therefore the value would
tend to be *expressed in* VAT-inclusive terms. The man in the
street might be prepared to pay £100 for it. Then £100 is the
VAT-inclusive value, and this then fixes its VAT-exclusive value
at £85.11. This is the value you "take" for the purpose of noting
in your accounts if you are VAT-registered.

Turning to the seller, if the seller is VAT-registered, he would
take the buyer's £100, keep the £85.11, and remit the £14.89 to
HMCE, which is fair enough. If he originally paid £1000+VAT
for it when it was new, and he reclaimed the VAT from HMCE, he
now disposes of it for £85.11+VAT and gives the VAT to HMCE.
What's fair is profit is fair in loss.

Now, if the seller is not VAT-registered, he keeps the whole £100,
but it is still an item on which the seller, when he acquired it,
will have paid VAT, either explicitly or implicitly, so although
he now has £100 of real cash, all of which he is allowed to keep,
it is still really £85.11 of the computer's intrinsic value, plus
£14.89 of VAT. He may have originally paid £1000+£175 for it, and
have written off 91.5% of its value while using it, so by selling
it for £100, he is in effect recovering 8.5% not only of the £1000
original VAT-exclusive value, but also of the £175 VAT he originally
paid.