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Partnerships and joint ventures – the VAT story

Partnerships come in all shapes and sizes. Rhys Morgan, associate director at Grant Thornton discusses some of the options

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Collaborations and partnerships within the social housing sector, and beyond, are becoming increasingly common. Organisations are starting to realise that sometimes the best option to achieve their desired outcome is to join forces.


The question we are then often asked is, “How will this affect VAT?”


As with most VAT-related questions, the answer is not straightforward and depends on a number of factors.


In essence, there are many choices available but the right route will depend on both the entity’s structure and its own approach to risk. The simplest arrangement is probably the establishment of a partnership. Under English law, a partnership is not a legal entity in itself. In Scotland however, when a partnership is formed, it is recognised as a legal entity separate from the partners that compose it.


In either case, from a VAT perspective the partnership is liable to be registered (as a separate entity) if it trades above the VAT registration threshold, and each partner would be jointly liable for any debts the partnership may incur.


There is also the possibility for entities to form a limited partnership. Under the Limited Partnership Act, they would register with the Registrar of Companies and there are different classes of partner.

The organisations that are involved in the management of the partnership are designated as general partners and are liable for all the debts of the partnership – whereas limited partners can neither be involved in the management of the partnership nor held accountable for the debts.


A further possibility, where a formal partnership is not desirable, is to form a joint venture or consortium. These titles have no legal significance for VAT purposes; they simply denote a situation where two or more entities agree to ‘come together’ for a specific business venture or transaction.

 

How a joint venture or consortium deals with VAT registration will depend on the agreement that they have in place. If this outlines that they have agreed to form a partnership, then they will be treated as a partnership for VAT purposes and be registered in this name.

 

If, on the other hand, the agreement between the individual entities falls short of establishing a formal partnership it should be handled differently. In this case, each organisation would need to account for the joint venture’s VAT through the existing VAT registrations of their individual companies.

It would also not necessarily be split 50:50. The contribution from each organisation would need to be worked out according to their individual contributions to both the venture’s outputs and costs.


For example, if entity A makes 30 per cent of the venture’s supplies, it would need to account for 30 per cent of any VAT due through its existing VAT returns, in addition to any VAT due from supplies of goods or services made independently.


Similarly, it would be entitled to reclaim any input VAT it had incurred that was directly attributable to its taxable supplies as part of the joint venture. Supplies between the joint venture entities would also need to be recognised and any VAT declared to HM Revenue & Customs.


Where an entity is not registered for VAT, it will be required to register if its proportion of the venture’s taxable supplies – together with any taxable supplies it makes outside the venture – exceeds the VAT registration threshold.


Occasionally, two entities will enter into a joint venture relationship to acquire, refurbish and sell a property. HM Revenue & Customs states in its internal guidance that in such cases it would expect to see a number of characteristics present in the relationship between them.


As a starting point, there should be some evidence of an agreement between the parties to act together in relation to the project, and the agreement should specify each individual entity’s obligations.


Where only one entity owns the property and the other agrees to provide services for the refurbishment, then this would not qualify. HM Revenue & Customs is unlikely to accept that a joint venture exists but will assert that the second entity is merely providing services to the first.


There is no one clear rule to follow for VAT and joint ventures. Where the parties form a separate partnership the VAT treatment of joint ventures can be reasonably simple but where no formal partnership exists, VAT accounting can be significantly more complex.


In either case, it is essential that the organisations involved determine their exact relationship and obligations from the start.

 

Rhys Morgan is an associate director at Grant Thornton

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