Housing Associations, or registered providers of social housing, are the main providers of supported housing in the UK and collectively manage nearly half a million houses nationwide.
A Housing Association may act as a standalone entity for VAT purposes or may be part of a business group, in which case it needs to submit a VAT return as a VAT Group. The latter, while often more tax efficient, can be very complex, prompting many to look at how they can simplify the process.
When it comes to managing Group VAT returns, it’s necessary to collect and combine data technology from multiple sources and control how VAT is applied. Technology can help here by providing automatic consolidation of member calculations and logic which allows the housing association to track and apply limits.
Partial Exemption and properties
Many housing associations use Partial Exemption, either Standard or Special Method (PESM), to calculate the amount of recoverable VAT they can claim because this allows them to treat each property or ‘development’ effectively as a cost base against which VAT costs can be allocated. In many instances, VAT calculations are currently carried out manually for each development, but in housing associations that have numerous VAT entities, this can be a very time-consuming process.
Where it gets even more complicated is that the recoverable rate of VAT can vary from development to development. This means calculation of VAT on a per property basis. Now, not only does the VAT process need multiple hugely complex calculation spreadsheets, but it will also include a large number of manual calculations in order to apply different percentage rates to each property. This makes the process not only time consuming but much more susceptible to error.
The risk of error can be effectively reduced by using technology to automate the process. As Housing Associations digitalise their processes in line with demands under Making Tax Digital (MTD), it presents an ideal opportunity to look at how automation can be used to further simplify the process. While PESM calculations do not need to be digitally linked under MTD for VAT, doing so can provide a host of advantages, from greater accuracy and time savings, to a centralised compliance repository and digital audit trails that can be used to improve confidence in the Return and prove compliance with the PESM to HMRC.
While a PESM is typically highly bespoke, it’s possible to recreate your existing sectorisation models within tax technology. Cost allocation can then be automated, allowing entities, sub entities or specific business activities to be treated as different sectors thanks to a range of templates that are designed to accommodate specific scenarios. Costs can be set up for each development, each of which is treated as a sub-sector, allowing a different recovery percentage rate to be applied each property. This is then set as a ‘rule’ so that it is applied every time a Return is generated.
Heads of Tax in housing associations have told us that VAT is an onerous task that involves time-intensive processes at both the beginning and end of the Returns process. Collecting, allocating, adjusting and reviewing the data sets is highly time intensive whether it is carried out inhouse or by an advisor.
Automating the VAT process could therefore significantly reduce the time and costs involved, as well as reducing risk; time that can be more productively used to review the recovery calculation and perform manual adjustments at year end. For instance, we recently helped a business reduce its manual workloads by 28 days a quarter across 18 entities.
Tracking your VAT
Technology can now also provide a higher level of assurance of compliance in the form of a digital audit trail that can be used to demonstrate best practice and prove that the association is observing compliance protocols.
A digital audit trail can link the nine boxes to the underlying transactions themselves and to any adjustment/s, helping to prove the calculation steps taken. Being able to access this information allows the Association to quickly satisfy any queries from HMRC and reduce the likelihood of future audit. With HMRC likely to come down hard on those that can’t demonstrate their compliance, being able to show you consistently adhere to specific compliance processes is going to a prime concern for many Housing Associations.
Some housing associations have already sought to arm themselves with compliance data by keeping notes on their VAT process and procedure and documenting their checks and controls. Tax technology can also be used to accommodate these existing records too, acting as a central repository so that all compliance data is held in one place.
We have developed a solution that can assist Housing Associations dealing with complex VAT environments. Our AlphaVAT compliance platform is designed to ensure compliance with the MTD for VAT mandation and can cater for the demands of Groups and bespoke PESMs. If this is an area you’d like to find out more about, please contact us for a consultation and/or demonstration.