Purpose

This decision is written to provide context around partial exemption and why this option is required. The option to tax option is an essential element of the Councils Tax Planning and to secure best value for the Council.

We have looked at both the current 7 year average which sits at 2.85% and the in year position which is projected at circa 3% to decide on whether ‘not opting to tax’ would see us breach our partial exemption limit.

The combined estimated £12.8m spend on these projects, Theatre Royal £6mil, Clock House £4.4m, Skatepark £1.3m and Walpole £1.1m in isolation would see us breach partial exemption in year if we didn’t opt to tax, it would also leave little or no headroom based on the 7 year average.

The financial impact of the breach would result in the council being unable to reclaim VAT on the £12.8m spend and also typically have to repay all the VAT related to exempt supplies previously recovered.

The solution to this, from the Council's perspective, is to "opt to tax" the land for each of the projects. This will result in any ‘rent’ (may include insurance rent) charges (both the "actual" charges and the invoices raised by the Council in respect of any barter arrangements) being subject to VAT.

As indicated above, based on current projections the headroom of 5% would be exceeded by 24.43% in year if the option is not taken, this would see our projected up-and-coming period stay in excess of 6.8%, assuming that all other spend returns to ‘base’ i.e. no significant spend.

Consequences of breaching the partial exemption limit in a financial year are severe: if the limit is exceeded (and cannot be contained under the seven-year average), the authority cannot recover any VAT related to its exempt supplies for that financial year, which can have significant financial implications.

VAT Analysis - from our Tax Advisors

Theatre Royal

To be certain of safeguarding the VAT recovery position, the Council might consider opting to tax the theatre. By making a taxable supply of the lease, the Council will be able to recover all of the VAT on the refurbishment of the property.

If the third party is an "eligible body" (as defined in section 4 of HMRC notice 701/47), qualifying admission charges will be VAT-exempt. This would reduce their ability to recover VAT incurred on their expenditure - including payments under the lease, should the Council opt to tax. This might affect the level of rent that the third party could afford to pay.

The third party operator would naturally incur VAT on the lease from the Council. If they are VAT registered and provided they are making taxable supplies, they should be able to recover the VAT charged on the lease. If however, they are partly exempt, they may not be able to deduct all VAT charged and they would need to run any VAT charged on the lease through their own partial exemption calculation to determine whether they can recover it fully.

Clock House

As with the other projects, the risk is partial exemption. I would suggest that the Council considers opting to tax the site (will cover both the museum building and café extension). The café operator is likely to be VAT registered and so able to recover the VAT charged on rent. By default, admission charges by the Council to an in-house run museum would be standard rated. There is a “cultural exemption” that Councils can seek, which would make the admission charges VAT-exempt – however I would suggest that the Council does not do so, as any increase in admission income would be more than outweighed by the cost of a partial exemption breach.

Walpole Bay Beach Facilities

You need to start by considering the VAT treatment of the activities following the construction. Letting out a cafe would likely be VAT-exempt unless you opt to tax. The "community container" is likely to be the same - although if it is supplied specifically for storage purposes, rents would likely be taxable regardless of any option to tax. If the toilets/showers are operated by the Council, this element will be non-business. Although there is a non-business element to the project, the cafe/community facility could still result in a significant proportion of the build cost needing to be included in the partial exemption calculation if the Council does not opt to tax. Opting to tax would require VAT to be added to rents - this might be recoverable by the cafe operator and community facility hirers if they are VAT registered, but it is quite likely that some smaller groups will not be.

Skatepark

Similarly, you need to assess the VAT treatment of operating income. Will the skatepark itself be operated by the Council - or will it be let to an operator? I assume that the commercial kiosk will be a lease/letting, generating income which will be VAT-exempt unless the Council opts to tax. As with Walpole Bay, a public toilet operated by the Council is a non-business activity. Once you have assessed the proportion of intended exempt activity, determine the effect on partial exemption, and opt to tax if the de minimis is at risk.

Option To Tax is generally irrevocable for 20 years.

Once a property has been opted, then (apart from a brief "cooling off" period) it cannot normally be revoked for at least 20 years. However, it currently seems probable that LGR proposals will result in the creation of a new unitary authority, which will take on the activities of the Council, other neighbouring authorities and the relevant parts of the County. This new authority will likely have a new VAT registration number. In previous LGR exercises, HMRC have taken the view that options to tax made by the authorities which cease to exist under LGR will lapse, and it will be for the successor authority to decide whether or not it wishes to opt to tax specific sites. Depending upon both the stage of the works and the successor authority's forecast of its partial exemption position, it might decide that it does not need to opt to tax.

Decision

Opt to tax the Theatre Royal, Clock House, Walpole Beach Facilities and Skatepark with effect from 23/07/26 as these regeneration projects progress to lease stages.

Reasons for the decision

Without an option to tax, the leases to the tenants for the four projects would be VAT-exempt, and any VAT chargeable in connection to the works would need inclusion within the Council’s partial exemption calculation.

This would cause a partial exemption issue - in that the amount of input tax incurred by the Council on the charges from the four Projects would result in a breach of the Council's 5% de minimis limit.

Therefore, to avoid the Council having to payback any previously reclaimed VAT an option to tax is required to reduce the Council’s financial risk exposure.

Background Information