In our recent webinar on "Stepping into Local Government Finance: Accounting Basics for Clerks and RFOs," one topic that garnered significant attention was Value Added Tax (VAT). This crucial aspect of financial management can often seem daunting, especially for those new to the field. Here's a comprehensive overview of VAT as discussed in our session, along with practical scenarios to illustrate key points.

What is VAT?

Value Added Tax (VAT) is a consumption tax levied on the value added to goods and services. In the context of local government, understanding VAT is essential for accurate financial reporting and compliance with HMRC regulations.

Non-VAT Registered Councils

If your council is not VAT registered, primarily because it only receives precept income and occasional grants or interest, you are still entitled to reclaim VAT on purchases. This is done through form VAT126 on the HMRC website. Key points to remember include:

1. Claim Timing: There are no strict deadlines for claims, but they must cover complete calendar months. If the claim is under £100, it must be for a full financial year.
2. Regular Claims: For ease and accuracy, it's recommended to file VAT claims quarterly or at least annually, aligned with the financial year end on March 31st.

VAT Registered Councils

Councils with significant taxable supplies or services (e.g., running a car park) need to be VAT registered. This involves more stringent reporting requirements, including:

1. Quarterly (or possibly monthly) returns: These must be submitted via HMRC's Making Tax Digital (MTD) system.
2. Accurate Record-Keeping: Ensure that all transactions are recorded correctly with the relevant VAT details, including VAT numbers and amounts.

Complex VAT Situations

For councils engaged in both VATable and exempt activities, such as hiring out rooms in a community hall, special rules apply. It's crucial to:

1. Understand Partial Exemption: This limits the amount of VAT that can be reclaimed if your council's exempt activities exceed a certain threshold.
2. Seek Specialist Advice: For complex situations, consulting with a VAT expert can help ensure compliance and optimise VAT recovery.

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Quick tip from Paul Reynolds

Calculating VAT from Total Amounts:

• For 20% VAT: To find the VAT amount included in a gross figure (total amount including VAT), divide the gross figure by 6. This will give you the VAT amount.
• For 5% VAT: To find the VAT amount included in a gross figure with a reduced VAT rate of 5%, divide the gross figure by 21.

These simple calculations can help you quickly determine the VAT portion of a total amount when the VAT is either 20% or 5%, which is useful for accurate financial records and VAT reclaims.

Practical Scenarios for Managing VAT

Here are some real-world scenarios that local councils might encounter regarding VAT:

Scenario 1: Claiming VAT on Councillor Purchases

Question: Can we claim back VAT on items purchased by a councillor for the council, even if the receipt is in the councillor's name?

Answer:Yes, you can claim VAT on items purchased by a councillor for council use, provided you have a VAT invoice that includes the VAT number and amount. However, for larger or more frequent purchases, it is advisable to ensure that the invoice is addressed to the council. This can be facilitated by having the invoice marked as "Councillor [Name], care of [Council Name]."

Practical Steps:

1. Small Purchases: For small, incidental purchases (e.g., stationery or refreshments), ensure the receipt shows the VAT amount and keep a copy for records.
2. Large Purchases: Request suppliers to issue invoices directly to the council, even if a councillor is making the purchase.
3. Regular Review: Periodically review your purchasing processes to streamline VAT reclaiming and avoid administrative hurdles.

Scenario 2: VAT on Grants Provided to Local Organisations

Question: We give grants to a local sports association, which provides us with invoices for their expenses. Can we claim VAT back on these invoices?

Answer:No, you cannot claim VAT back on invoices for expenses incurred by another entity, even if you are funding those expenses through grants. The goods or services must be purchased directly by the council to reclaim VAT.

Practical Steps:

1. Clear Guidelines: Establish clear guidelines for grant applications and ensure that recipient organisations understand the VAT implications.
2. Documentation: Maintain thorough records of all grants and associated expenses for audit purposes.

Scenario 3: Managing VAT for Non-VAT Registered Councils

Question: As a non-VAT registered council, how should we manage our VAT claims, and what are the best practices?

Answer:Non-VAT registered councils can reclaim VAT on purchases related to council activities using form VAT126. It is important to maintain clear records and submit claims regularly.

Practical Steps:

1. Regular Claims: Submit VAT claims quarterly or at least annually, ideally aligned with the financial year-end on March 31st.
2. Record Keeping: Keep detailed records of all transactions, including VAT invoices, to facilitate the claiming process.
3. Claim Reviews: Periodically review past claims to ensure all eligible VAT has been reclaimed. If no claims have been made for a while, you can reclaim historically, provided you have the necessary documentation.

Scenario 4 Transitioning to VAT Registration

Question: If our council exceeds the VAT threshold, what steps should we take to transition to being VAT registered?

Answer: a council should register for VAT if they make any taxable supplies, however, HMRC will not enforce this until the expected output tax (the amount of VAT the council will charge) reaches £1000 a year.

Practical Steps:

1. Monitor Income: Regularly monitor your income to anticipate when you might need to register for VAT.
2. HMRC Registration: Register for VAT with HMRC as soon as you meet the criteria.
3. MTD Compliance: Ensure you have suitable accounting software to comply with Making Tax Digital (MTD) requirements for VAT returns.
4. Staff Training: Train relevant staff on VAT processes and MTD requirements to ensure smooth compliance.

Conclusion

Navigating VAT in local government finance can be challenging, but with the right knowledge and tools, it becomes manageable. Whether you're reclaiming VAT as a non-registered council or submitting regular returns as a VAT registered entity, keeping abreast of the rules and maintaining detailed records is key. For more complex scenarios, don't hesitate to seek specialist advice to ensure your council remains compliant and efficient in its financial management.

For further information and resources, consider joining our next webinar or exploring HMRC’s VAT guidelines for local authorities.

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