As advisors, there are certain drivers to review a business’ VAT affairs. Where there is particular complexity in a business or organisation reviewing the VAT considerations is prudent in any event but a particular focus is drawn by business acquisitions (the due diligence process) and at the time a practice acquires a new client.
Where a business purchase is planned, due diligence is usually a pre-requisite. Companies, organisations and charities will usually have had regular discussions with advisors about direct tax and their accounts preparation with their advisors preparing the relevant submissions. VAT is frequently subject to far less oversight. It is not unusual that VAT due diligence is the first in-depth review of a VAT position for a business. Knowing that a business has a clean bill of VAT health is of course a positive but identifying fundamental or systematic issues is essential during an acquisition.
VAT due diligence manages risk but also ensures that the acquisition price is correct for the business. To give regularly encountered examples, we see systematic issues around VAT recovery (the partial exemption rules), VAT liability of sales and failing to identify issues and liabilities associated with cross border trade that present a significant risk source from a target business. This may have resulted in businesses over-recovering VAT by tens of thousands of pounds, incorrectly treating sales as not subject to VAT or missing a VAT registration requirement in an EU country.
Aside from the risk that a significant liability may have accrued to HMRC that the buyer needs to appreciate this also means that the valuation of the business is probably incorrect i.e. if less VAT is recoverable or certain sales were incorrectly treated as not being subject to VAT the profit valuation quantum is quite possibly incorrect also.
We regularly spot fundamental issues and systematic problems during VAT due diligence that might otherwise not have been spotted by a non-VAT specialist. A business acquisition may still go ahead but that is a very different choice when an informed one and importantly at a more realistic price!
When a new client is engaged, this is an ideal opportunity to review the client’s VAT affairs, particularly if they are of a certain scale or level of complexity. The immediate post engagement period is unique in that, as a new advisor, there is not a legacy expectation. This is also a good opportunity to highlight any potential opportunities for VAT savings.
An expert VAT review or short form due diligence may be advisable for a number of businesses but should certainly be considered if any of the following factors are present:
- VAT exempt or zero-rated business activities are undertaken.
- Cross border supplies of goods and services are made, whether B2B or B2C.
- The client has significant land and property and is involved in various transactions around this.
- There is a corporate group with transactions between the group members.
- The client is an organisation with charitable or non-business activities.
- The client has multiple establishments in different countries.
- Complex agent arrangements.
- The client is larger with a diverse range of activity.
The list could easily be expanded further but is really an illustration of the sort of areas that regularly produce VAT risks due to more involved rules and scope for misinterpretation.
We have undertaken many due diligence projects and VAT reviews protecting buyers interests on multiple occasions where significant risks might have been inherited or the incorrect price paid for a target business. We also have noted opportunities and VAT advantages that may be gained. In terms of new clients, there is a great opportunity to immediately address any VAT complexity, issue or opportunity immediately demonstrating a level of attention that may not have been demonstrated by a predecessor.
If you have recently been asked to review a business acquisition or gained a new client who has varied or more complex VAT considerations, then specialist VAT assistance is likely to be highly beneficial. Please contact Robert Thorpe if you would like to discuss how Constable can offer help with this process.