Introduction to VAT for Local Councils

Local councils can recover VAT paid out on non-business activities by submitting a Form 126 claim to HMRC.  Councils that engage in vatable business activities may have to register for VAT.  The registration requirements are different to that of normal businesses and HMRC expect a council to register for VAT if the amount of VAT collected in the year is anticipated to be over £1000.  Once registered the council will be required to submit VAT returns to HMRC using Making Tax Digital.

 

VAT Exemption

Councils may also engage in exempt business activities meaning that VAT is not charged as the supply is exempt. A common example of this is room hire.  In these circumstances the VAT attributable to this supply can be reclaimed, but only where HMRC regard the amount of VAT being reclaimed as 'insignificant'. VAT attributable to exempt activities is insignificant only if it amounts to less than one of the following:

• £7,500 per annum
• 5% of the total VAT incurred on all purchases in a year

It is important to note that if the amount of VAT exceeds this figure then no VAT (on the business activities) can be reclaimed - it is not simply capped at this figure.  However, it is possible to consider the position over a longer period of time. The council must work out the amount of VAT attributable to its business activities for the year at the end of each financial year.  This can include both VAT directly attributable to the business activities as well as a proportion of VAT on their general expenditure and overheads. To do this the model method or any other agreed method can be used.

• More details on VAT for local authorities can be found here: VAT Notice 749.
• If you are VAT registered an alternative method of partial exemption can be used. More details are here: VAT Notice 706.

 

Exceeding the limit and the Option to Tax

Much of the time councils will not exceed the limit when simply incurring costs of their business activities such as running the venue from which the room hire is provided.  However, care should be taken when a large project or planned works are undertaken, such as erecting a new building or significant refurbishment to a building from which rooms are hired. This is because the total VAT incurred on these works will very likely go over the limit meaning it would potentially not be able to be recovered.  In these circumstances taking specialist VAT advice is highly recommended.  It may be that the council is advised to take the option to tax.  This means registering the building or land for tax so that VAT is then charged on the services provided (e.g. room hire) and also meaning that all associated VAT on expenditure can be reclaimed. If this decision is taken then it is important for the council to consider the impact on its income - do they increase the prices or absorb the VAT element as part of the original cost to not affect users of the service.

• More details on opting to tax land and buildings can be found here: VAT Notice 742a.

 

VAT Exemption Calculations on Scribe

The calculations relating to VAT can use the data from Scribe but will need to be done outside of the software.  If any adjustments are required to the VAT return they can be entered on to Scribe to be picked up in the next VAT return period.  It is perfectly acceptable to enter transactions for the total adjustment figure and attach the workings to the transactions on Scribe.

 

The calculations required will depend on the method being used but it is recommended to have specific Cost Centres and Cost Codes relating to your business activities so that it is easier to track them and the VAT elements relating to them.

 

Useful reports on Scribe to assist with this are as follows:

• ▶️ Detailed Cost Centre - can be run for specific cost centres or cost codes and for a specific date range. Shows VAT against each transaction.
• ▶️ VAT List - can be run for specific quarters or custom date ranges. Shows the VAT type and amount against each transaction. Cannot be run for specific cost centres or cost codes.

 

Adjustments in Scribe

If your calculations result in VAT that cannot be reclaimed then adjustments to reflect this will be required on Scribe. This is so that the VAT position on Scribe will continue to accurately reflect the amount of VAT that is owed to you or by you to HMRC and also to adjust the return or claim to account for VAT not being recovered so this can be submitted to HMRC.

 

The adjustment must be entered as a pair of transactions to ensure the bank reconciliation is not affected. Let's use an example of a partial exemption calculation that resulted in input VAT that cannot be reclaimed. The entries would be as follows:

• Negative Payment Entry
  • Date: within the VAT return period in which it is to be included
  • Description: e.g. VAT partial exemption adjustment
  • Supplier: HMRC
  • VAT Type: S: Standard
  • Net : 0.00
  • VAT: the figure that cannot be reclaimed, entered as a minus
  • Total: the figure that cannot be reclaimed, entered as a minus
• Payment Entry
  • Date: within the VAT return period in which it is to be included
  • Description: e.g. VAT partial exemption adjustment
  • Supplier: HMRC
  • VAT Type: X: Outside scope
  • Net: the amount that cannot be reclaimed (same as above, no minus sign this time)
  • VAT: 0.00 
  • Total: the amount that cannot be reclaimed.

The two entries will net each other off and should be reconciled using the same cashed date to not affect the bank reconciliation. The VAT return will update with the adjustment to the amount of VAT that can be reclaimed. This figure will show as a cost to the accounts. 

 

💡Ensure you check your calculations are correct and have been entered into Scribe correctly before submitting your return.