Local authorities follow VAT Notice 749 in determining which activities are business or non-business for VAT purposes. The VAT notice states that: “Because VAT is a tax on transactions, individual circumstances need to be considered according to their facts. But the general rule is that where a public body is funded by way of public expenditure (such as grant-in-aid) to do something for the public good, it’s unlikely to be engaging in business activities for VAT purposes. Such activities are outside the scope of VAT”
A LATCo (Local Authority trading company) will however be trading on normal commercial terms and therefore it is worth taking advice on VAT registration and, in particular, to be aware of how VAT is now administered through Making Tax Digital (MTD).
We are now eight months into HMRC’s regime of MTD for VAT (which commenced on 1 April 2019). This covers VAT registered entities whose VATable income is in excess of the registration threshold. This currently stands at £85,000 (measured on a rolling 12 monthly basis)). The new requirement ensures that the data to complete VAT Return is submitted directly from the accounting records, which are maintained in an electronic format, without the need to retype the relevant figures into the boxes that make up the VAT Return.
This new requirement does mean that the basic accounting records need to be kept in a bespoke software package, which is compatible with HMRC’s systems (the most popular ones being Quickbooks, Xero and SAGE), or in a spreadsheet format using bridging software.
If your VATable income remains below £85,000 you are not required to register for “Making Tax Digital” and can continue to file Returns via your existing HMRC account. (You can however register for “Making Tax Digital” on a voluntary basis, but once in the scheme, you cannot leave).
Some VAT registered entities such as Trusts, Groups and not for profit organisations had their entry to the scheme deferred until 1 October 2019. They do now need to take steps to “come on board” and the first cycle of Returns that will be relevant in this case are those with quarters ending 31 December, 31 January and 29 February.
At the outset of “Making Tax Digital” HMRC announced that there would be a light touch approach to compliance in the first year of the scheme and that penalties would not be levied during that period. VAT registered entities who did not sign up in the first cycle of VAT returns after 1 April, with quarter ends of 30 June, 31 July and 31 August, will have received a gentle reminder that it is a legal requirement for them to do so. We are expecting that the letters to those entities that miss the second cycle of VAT Returns will be somewhat more “heavy handed” so time to take action if you have not already done so!
