The VAT rules often raise some challenging questions for family offices. This is because high net-worth families often have a diverse range of activities, some of which may fall within the VAT rules and others that do not.
VAT is a tax on goods and services supplied in the course of business. Therefore, if it is not a business activity, it is outside the VAT rules. However, deciding whether an activity is business or non-business can be challenging.
A common situation where this issue arises is where a personal interest grows into something that could be described as a business. For example, where a family member has an interest in fine art. Over the years, works of art have been collected and items are bought and sold each year, usually at a profit. So, is this a business or a hobby?
In order to answer this question, we need to understand what ‘business’ means for VAT purposes. Unfortunately, this is not fully defined in VAT regulation. It is clear that ‘business’ is intended to be widely defined, but there is no single factor which is determinative. For example, profit motive, transaction value and purpose are not decisive when taken in isolation. Instead, it is necessary to consider all of the circumstances and form a view. Relevant factors will include whether the activity has reasonable continuity, if it is carried on in a business-like fashion and if the activity predominantly concerned with selling goods to customers is for payment. The answer may be very finely balanced.
Where business activities are carried on, it may be necessary to register and account for VAT on the goods or services supplied. Clearly, this could be undesirable where customers are unable to reclaim any VAT charged (such as private individuals). There are, however, often situations where VAT registration is desirable, so that VAT incurred on costs relating to the activities can be reclaimed from HM Revenue & Customs. For example, racehorse owners are often keen to register for VAT, as the VAT which is reclaimable on training fees, upkeep, etc. may exceed VAT payable on income from sponsorship, prize money, etc. Although horseracing itself is not considered to be a business activity, HMRC operates a special scheme that allows racehorse owners to register for VAT, subject to meeting certain conditions.
Carefully considering the VAT treatment of activities is important, not only to minimise the risk of penalties for getting the VAT position wrong, but also to ensure that activities are structured in the most VAT efficient way possible.
If you would like to discuss this, or any other VAT matters, please contact our family office VAT specialist Lisa Burnside