By Kamlesh Chauhan, Senior Manager, Haysmacintyre
The rules governing VAT are continually changing due to new VAT legislation being introduced, updates in HMRC’s guidance and interpretation and various case law precedents and decisions being released over time. Hedge fund businesses will often not have considered their VAT position in any detail for a number of years and may not be aware of the VAT compliance requirements at the end of their VAT year, which can be a perilous position to be in!
VAT year-end and why it is important
We are fast approaching VAT year-end for most businesses, it is important to note that this is not the same as the accounting year-end! The VAT year-end date will depend on the VAT return period stagger allocated and whether your VAT return periods end in March, April, or May (unless special agreement is reached with HMRC you will have one of these year-ends allocated to you).
If you are partly exempt (i.e. you have some income that is exempt from VAT) you will be required to carry out an annual adjustment calculation at the end of each VAT year. This requires you to apply the normal VAT recovery method using annual data (rather than on a quarter by quarter basis). The difference between what can be reclaimed on an annual basis compared to what has been entered in the VAT returns then forms the annual adjustment. Which is usually included in the next VAT return following the VAT year end. Many managers are unaware of this requirement and partly exempt businesses could be losing out on additional VAT that would have been reclaimable as a result.
In addition, many businesses in this sector will spend a significant amount of expenditure on the purchase and refurbishment of new premises. It is important to remember that any VAT incurred on commercial property (purchase and/or refurbishment) costing over £250,000 is subject to the Capital Goods Scheme, with yearly adjustments (based on the annual adjustments referred to above) required over a 10 year period.
The VAT year-end is an opportune time for partly exempt businesses to review their VAT recovery position for the year. It may be possible to improve the VAT recovery position by considering the use of a different partial exemption method to the standard method. This may also present you with an opportunity to reclaim additional VAT if you have expenditure subject to the Capital Goods Scheme where the VAT recovery position has improved in the 10 years since the costs were originally incurred.
Beware of HMRC
It is worth noting that HMRC can go back up to four years to assess for any errors, in the current climate with the need to increase tax revenues, the hedge fund sector is an area that could easily be targeted for review by HMRC. A simple error (of not restricting input VAT recovery for partial exemption) could be compounded and could add up to a significant amount of VAT over a four year period.
In addition to the VAT due, HMRC will also seek to charge interest and penalties. The penalty will range from 15% to 30% of the VAT owed for a “careless” error identified by HMRC (deliberate or concealed errors will attract even higher penalties). The actual penalty amount is subject to HMRC’s assessment of whether the business took “reasonable care” or not in making the error.
What to do now?
We would encourage all hedge fund businesses to review and consider their VAT position at least once a year and to seek specialist advice to ensure that they not only avoid the pitfalls but also take advantage of potential improvements to their VAT recovery position.
VAT is not straight forward and the complexities of the VAT rules and continuous developments mean that continuous monitoring and review is recommended as best practice. The regular reviewing of your VAT position by external advisers also demonstrates that “reasonable care” was being taken by the business in its VAT affairs. If any errors do arise, the demonstration of reasonable care will help mitigate and reduce any penalties that HMRC may seek to apply.
Contact: Kamlesh Chauhan, Senior Manager – VAT, Tel: +44 20 7969 5584, E: firstname.lastname@example.org