The recent announcement from the chief Constable of Police Scotland revealing that the force has incurred additional VAT costs of £76.5m since forming in 2013, highlights the need for all businesses to check their tax position prior to, during, and following any significant changes in their legal structure, asset management or business model.
In these circumstances, the additional VAT cost relates to the new force not obtaining a special VAT status from the UK Treasury that would have allowed it to reclaim the VAT it incurred on costs. The technicalities surrounding Police Scotland’s VAT status relates to a very specific area of VAT legislation, that only affects public bodies. However the significant bill is a very timely reminder that all organisations should always consider the VAT implications of any business decisions.
Paul Russell, Associate VAT Director at RSM said:
‘The additional VAT cost, incurred by Police Scotland, is a result of the unintended VAT implications surrounding the restructure of Scotland’s police services. The primary impact resulting from the restructure has been the removal of special VAT recovery rules, which are specifically aimed at easing the VAT burden on public bodies. As a result Police Scotland’s now face a massive irrecoverable VAT bill.
‘VAT legislation can be complex and therefore such unintended VAT costs are not unique to public bodies and can impact everyday business decisions for all public and private organisations. For example, some businesses incur unintended VAT costs when restructuring or reorganising their business, selling or buying a business or undertaking property transactions including when trading properties are moved within a group.
‘Irrecoverable VAT costs may be avoidable, if the business considers the VAT implications of planned transactions at the time and seeks VAT advice prior to the deal. However it’s not only the additional VAT costs that a business needs to consider, they also need to factor in the potential financial penalties HMRC might apply if a business gets its wrong.'