Covid disruption may have caused many clubs an inadvertent VAT recovery problem This issue can be easily overcome but it does require clubs to act and seek HMRC approval.During the periods of Covid restrictions on hospitality venues, many clubs will have experienced a dramatic reduction in taxable incomes, such as bar and catering sales. However, VAT exempted incomes generated from participatory subscriptions have largely remained the same. The consequence of this is that VAT recovery rates have materially reduced, causing concern. This reduction is particularly harsh and can be extremely costly where clubs are currently incurring one-off costs, such as building works, or other facility improvement works.
The issue arises due to many clubs using a VAT partial exemption recovery method based upon actual income generated in the year. This is termed as the ‘standard method’ and generally reflects the activities of clubs to provide for a ‘fair and reasonable’ level of VAT recovery. Most clubs can fully recover all VAT they incur as the level of exempt input tax is low and falls below the annual allowance of £7,500. The exception to this is years where there are one-off costs such as building works or facility improvements where only a proportion of the VAT incurred can be recovered.
The issue clubs are faced with is that the Covid closure has completely changed the income clubs are generating. As stated above, exempt income may have largely remained at the same level whilst taxable incomes have dramatically reduced. This is of course an unintended consequence of the Covid closures but can cause a real problem for clubs impacting upon VAT recovery.
This issue can be overcome, but clubs need to act to retain VAT recovery rates at pre-Covid levels. Clubs can seek approval from HMRC to use an alternative VAT recovery method termed as a ‘Partial Exemption Special Method’ (PESM) to ensure that a fair recovery rate is achieved IN Covid impacted years. HMRC will accept that clubs switch to a ‘use’ based recovery method rather than actual income generated to overcome the distortion caused by Covid. Typically, ‘use’ would be measured by using the income generated in a pre-Covid year as the basis for the method.
For example, if VAT year ending in 2022 has been impacted then the club can seek approval to use the income from VAT year ending 2021 (or even 2020 or 2019) to adopt the same per centage VAT recovery rate as that achieved in the earlier year.
Of most concern is where clubs are currently, or have recently, undertaken a capital project. If clubs are required to apply a materially reduced level of VAT recovery due to the Covid impact on incomes, this could result in a material cost from irrecoverable VAT. Even projects undertaken up to ten years ago could be impacted. Projects where the net cost is over £250k are accounted for under a special scheme termed the Capital Goods Scheme where the VAT recovery is assessed over a 10-year period. A reduced VAT recovery rate in any of the ten years following completion could have a material cost arise.
Clubs who believe they may be impacted by this issue are encouraged to act and submit a PESM application to HMRC.
If you are a RYA affiliate and have a VAT enquiry, you can contact VAT expert Russell Moore for 30-minute consultation as part of your affiliation benefit. Russell can make the PESM application on behalf of RYA affiliated clubs for a fixed fee of £250. Contact Russel email@example.com | 07710 329317.