Hello everyone, I’m Steve Parkinson, a finance specialist with a particular focus on public sector finance and VAT matters. I’ve just delivered an online session for Scribe and I’m delighted to share my insights with you in this blog. With years of experience in the parish and town council sector, I’ve developed a knack for making the complex world of VAT more accessible and less daunting.

In this post, specifically designed for you, Clerks and RFO's of Parish and Town Councils, I am aiming to provide a basic understanding of some key aspects of VAT and its implications on your day-to-day operations. Remember, these are the basics, and while they provide a foundation, there are many more nuances to explore to ensure effective VAT management within your council.

The VAT Act 1994 sets out the legal framework for VAT in the UK, including the rules for public sector bodies. It's essential to understand how this legislation applies to your council’s operations to ensure compliance.

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Business and non-business

Being able to distinguish between business and non-business activities is the crucial first step in getting your VAT right. This is because Section 33 of the VAT Act 1994 allows councils (but not Parish Meetings) to reclaim an unlimited amount of VAT incurred on costs related to their own, non-business activities, without being VAT registered.

Non-business activities include duties performed under a statutory obligation, services available for free (such as the open spaces, children’s play areas, war memorials and street lighting) and the leasing or freehold sale of land (with or without buildings), for the nominal sum of a pound or less, where there is no other payment of any form involved.

Activities that are charged for but governed by a specific legal regime that doesn’t apply to the private sector, can also be treated as non-business.  The provision of allotments and cemeteries (but not crematoria) fall into this category, although certain supplies within cemeteries may be business activities.  More recently, in 2023 HMRC accepted that charging for use of local authority sports facilities can be treated as a non-business activity.  

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Use of “donations”

Where money is received for a specific purpose, the resulting expenditure can only be treated as non-business if the council retains ownership of any goods, uses the expenditure for its non-business purposes and does not do something in return for the payment.

If a council makes purchases for another organisation, which then reimburses some or all of the council’s expenditure, it is not entitled to reclaim VAT on the associated costs. 

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Taxable supplies & VAT registration

Charging for the supply of goods or services (apart from the exceptions above, and the use of land, which is VAT exempt) is normally a taxable business activity.  Examples include bar or café sales, souvenirs, advertising, admission to events such as firework displays, car parking, boat mooring and hire of equipment. 

A council that isn’t VAT registered (with a 9-digit VAT number) must not charge VAT and it is not entitled to reclaim VAT incurred on costs relating to its taxable business activities.

The normal VAT registration threshold does not apply to local authorities, which are liable to register if they make any regular taxable supplies.  HMRC's current policy is only to enforce this where the expected VAT due on sales by an authority will be at least £1,000 a year.  A council will reach that point if it has £5,000 of income that should be taxed at 20%.

Before registering, a council should ensure it has good accounting software, as it will be required to keep digital records and submit VAT returns directly from the software.

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VAT-Exempt activities

The situation is more complicated where a council undertakes VAT-exempt business activities (the most common being charges for the use of land, buildings or rooms, but education provided by a local authority is also VAT-exempt).  You may not be able to reclaim the VAT your council incurs on these activities if it rises above a certain threshold (usually £7,500 per annum), although that doesn’t stop the council reclaiming its non-business VAT.    

This becomes a significant risk when a council undertakes a major project on a building that earns VAT-exempt income, such as extending a village hall or renovation of a rented-out building.  Make sure you take advice well in advance of any work being carried out.

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Conclusion  

Remember, it's better to address mistakes and correct them promptly, rather than waiting for them to be discovered during an audit or inspection. Transparency and proactive management of VAT can go a long way in avoiding potential pitfalls.

It's important to stay up to date with the legislation and guidance relevant to your council. Don't hesitate to seek professional advice if you're unsure about any aspects of VAT in the public sector. You can also arrange further VAT or finance training with me through your local ALC.

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About The Parkinson Partnership

The Parkinson Partnership LLP specialises in providing VAT (Value Added Tax) and other financial advice specifically for parish, town, and community councils in England and Wales, as well as their associated charities. This firm is described as a small, niche accountancy practice with a focus on serving the local council sector. Their services include offering friendly, practical advice and affordable consultancy to address complex VAT issues, guiding clients from the initial planning stages of a project through to its completion and final VAT claim. They have a track record of assisting numerous council clients with various projects, demonstrating a deep understanding of the needs and challenges faced by local councils

Phone 023 82 18 23 18

Email steve@parkinsonpartnership.uk

Web: https://www.parkinsonpartnership.uk

Facebook: https://www.facebook.com/profile.php?id=100069323317233

Q&A 

Throughout our discussion, I fielded a range of interesting questions from the audience. These inquiries touched on a variety of VAT-related topics, providing real-world examples of the complexities and challenges involved. Here, I'll share a few of the notable questions and my responses to them.

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Q1: "Our Parish Council is the sole managing trustee of a village hall, can VAT be reclaimed on hall expenses?”

A1: The council can reclaim VAT when it uses its own funds to pay for something and gives it to the charity.  If the council spends charity funds, it can only reclaim VAT where the expenditure is for the charity’s non-business purposes.

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Q2: "Our council is renovating our sports changing rooms.  Can we reclaim VAT on the costs and do we have to charge VAT on sports fees?"

A2: HMRC now accept that charges for the use or hire of sports facilities (anything designed or adapted for participating in a sport such as a pitch, court, bowling green, swimming pool or gym) is a non-business activity for a local authority (but not a charity).  VAT can be reclaimed and no VAT is charged on the fees.

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Q3: "Our handyperson buys equipment for the council and we reimburse them.  Can we reclaim the VAT?” 

A3: Yes, if they are an employee, making a purchase on behalf of the council in the course of their duties and they obtain a VAT invoice.  HMRC accept the employee as being “the council” in making the purchase.  No, if they are a self-employed contractor that isn’t VAT registered, charging the council for their services by invoice.

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Q4: "We made a mistake on our VAT return a couple of years ago and underpaid VAT. What should we do?"

A4: If you discover a mistake on a past VAT return or VAT126 claim, you should correct it as soon as possible. The method of correction depends on the nature and scale of the error. If the net value of the mistake is less than £10,000, you can usually adjust your next VAT return or claim.  If it's above this, you'll need to report it to HMRC. 

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Remember, these answers are general guidelines and your situation may require specific advice, which is available through your county association as part of your membership.  If you're unsure, it's always a good idea to seek professional advice.

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