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Over the years, I’ve carried out more VAT reviews and written more VAT due diligence reports than I can remember.
These reviews have typically taken place during ‘M&A’ activity, where shareholders are selling some or all of their interest in their business or are seeking funding or investment for it. The investor/funder/buyer will want to know whether there are any skeletons in the cupboard and VAT is often a high-risk area.
The aggregate value of VAT flowing through a business can often be surprisingly high, so if a business gets its VAT wrong, things can go spectacularly wrong, so the sensible investor will make sure that VAT is scoped into any due diligence process.
A good VAT due diligence review will look at much more than just whether VAT returns have been submitted and paid (which often seems to be the extent of many VAT due diligence reports I have read).
The best VAT due diligence reviews aren’t just ‘exercises’ (that typically involve a bit of box ticking and don’t really give you any insight into how VAT affects the business) but are focused reviews that identify and review the key areas of VAT risk and VAT opportunity in a business.
These can vary significantly depending on the type of business, not to mention size and complexity. Businesses that offer services that are VAT exempt/non-business or are subject to VAT at the reduced-rate or zero-rate are obvious examples of businesses that perhaps need a more focused review, but there are potential VAT risks and opportunities in all businesses, even those that are fully taxable or those that aren’t VAT registered.
I often hear that VAT due diligence is not relevant for businesses that aren’t VAT registered but this can often be far from the truth. For example, I have carried out VAT reviews for financial intermediary businesses that weren’t VAT registered, only to find that they were liable to register for VAT not because of their core activities but because of VAT rules relating to services bought from outside the UK.
I have also advised clients who were not liable to register for VAT but were able to register voluntarily and recover VAT costs under special VAT reliefs available for certain UK businesses providing services to non-UK customers.
Some businesses also have very specific VAT issues that need specialist knowledge to fully understand. A good example of this is the parking sector. I have advised parking businesses on VAT for many years and the VAT complexities faced by parking operators in particular are often misunderstood and need specialist advice to navigate through.
If a potential issue is identified, not only may there be opportunities to mitigate past exposures, but steps can often be taken to manage the impact of any exposures in the future. This is why many businesses find VAT reviews so valuable, whether or not there are potential investors on the horizon and the benefits of being ‘on the front foot’ should not be underestimated.
If a potential VAT issue is highlighted during a sale process, one of the biggest enemies faced is time, particularly if a matter cannot be resolved without discussing or negotiating with HMRC. I have lost count of the deals I have advised on where a VAT issue has arisen that could have been resolved had the issue been identified earlier, but while uncertainty exists the buyer/investor will have the whip hand and can use the issue to drive down price.
A VAT due diligence review is not necessarily a bringer of bad news, either. I mention ‘VAT opportunity’ above as a key part of a due diligence review because although due diligence is primarily focused on compliance, another reason for carrying it out is that it not only gives a business some comfort that its VAT processes are sound (or not) but also provides an opportunity to take a wider look at the business and identify potential opportunities for VAT savings/efficiencies.
Although significant benefits often arise from a VAT review, investing in one can often seem like a costly exercise for some businesses, with no guarantee as to what the outcome will be.
We understand this, which is why we not only carry out full in-depth VAT reviews, but also offer high-level VAT reviews, often for new clients, that enable us to understand the business better and enable initial discussions on potential areas of VAT risk and opportunity.
Another area that often goes hand in hand with VAT due diligence is VAT structuring, e.g. advising on potential VAT Group structures or intra-group service agreements. Efficient VAT structuring can help minimise irrecoverable VAT costs, whether day-to-day costs or one-off deal costs.
Again, forward thinking on VAT structuring can often enable valuable savings that might not otherwise be available.
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