A friend and I are starting a Self Storage company in Swansea and we're both keen to make our money go as far as it possibly can. We've pitted suppliers against each other and searched tirelessly for the best industrial unit to house ourselves and we're now discussing details with banks for finance, so the beginning is close.
The dilemma is this.
Self storgage is zero rated for VAT and we've discovered that it will benefit our day to day finances significantly not registering. Great. However, we'd end up paying £16-18 grand VAT on our fitting out and equipment costs (Mezzaninefloor / partitioning / electicals etc.). Not so great.
My potential partner in all this has suggested setting up another company which will act as our VAT registered overseer, able to claim back these figures, and we'd then get the best of both worlds but I'm a little unsure of the necessary details and paper trail that would make it a legtitimate manoeuvre.
Would the VAT registered company have to lease the unit contents to us and then charge the storage company VAT therefore ruining the whole idea? Or am I missing something cruicial here?
On one hand it seems terribly legitimate, the other, quite dodgy.
Any help or guidance would be very much appreciated, even if it's a case of "Don't be so bloody stupid!"
I think so, all you would be doing is putting another level into the business relationship.
This is along the classic idea of creating new limited companies for the same trade when turnover approaches the registration threshold (which ultimately doesn't work).
If you created a second company, you would have to demonstrate that it had a trade. HMRC don't allow you to register simply to reclaim input VAT.
Someone else may be able to approach this more laterally, but I'm afraid my brain is a bit weary after the budget!
However, I would suggest you speak to a VAT specialist, there may be an angle. I'm not suiggesting for definite that there is, but I'm not a VAT specialist, and VAT is a complicated area.
Had a look on HMRC website but cant see where it says self storage is 0% rated from a VAT viewpoint.
If you are sure that it is then unless i'm missing something it would make sense to be VAT registered as you wont have to charge VAT on your supplies as zero rated but will be able to claim back VAT on all your purchases/expenses. So will always be at worst in a £nil position or at best a VAT reclaimable position.
That being the case would make sense to be registered for monthly VAT returns, to improve cash flow, by claiming the input VAT each month rather than the norm on a quarterly basis.
I found several self storage websites that all stated they were exempt from VAT. Thus meaning that could not reclaim any VAT on purchases. Excess sales such as padlocks are Vatable though.
I cannot see any reason why you would have another company try to reclaim the VAT as it simply would not work and would give a net effect of nil and your storage company would still be in the same position.
What you now need to do is concentrate on producing a good cash flow forecast to ensure that all this is taken into account and ensure your storage charges take into account this so you actually make money!!
Hi Tom I'm not a VAT expert but can confirm what Merlion says above, ie the majority of the self storage industry works on an exempt basis : you don't charge VAT and you don't reclaim it either.
It is possible to "opt to tax" if you want to, however. We have one store where we do charge VAT.
In our experience though it's not advisable - yes, you'll be able to reclaim VAT on your fit out costs, but if you are successful you will lose out in the long run. There's a competitive market rate for storage and you'll be getting 20% less than most of your self storage competitors. The amount of VAT you'd be able to reclaim is unlikely to make up the difference.
The self storage market doesn't seem to be sensitive to VAT on sales - we thought our VAT registered store would give us an advantage for business customers but it hasn't in practice.
Good luck!
John
ABC Selfstore
PS If you haven't already, try the self storage association at http://www.ssauk.com/ for self storage industry advice.
If as the 2 above have said that self storage is exempt then this changes my view.
You wont be able to reclaim the VAT if you register the business.
Equally there would be no benefit in setting up another company to reclaim the VAT on the fit out and equipment as, like you say, this company would need to charge the storage company for use which would be VATable which you dont want.
In theory i suppose you could set up the company to reclaim the VAT but give the storage company the use free of charge. Though this would probably be seen as VAT evasion plus you would have the added costs that comes with another company ie another set of accounts each year, company tax return, annual returns etc. If it does work then you should set up the company to reclaim VAT as a subsidiary of the storage company as the losses of the company could be surrendered to the storage company under group relief for CT purposes. The only problem would be is if the subsidiary company is set up to trade (probably not unless was actually supplying any services to anyone). Probably need to get professional advise to see if is is possible (if it is seems like it is very much in the bending of rules category).
they would be VAT exempt unless they use self storage containers on the site which are subject to VAT.
I think that the best move that Tom could make at the moment is getting their own accountant involved in this. It would really help to involve a good accouintant from the outset of the business in order to avoid expensive mistakes not least in relation to what can be expensed and what will need to be capitalised.
Tom,
I echo the thoughts in relation to the second company having no financial basis so HMRC are likely to regard the two entities as one as the second entity would only exists as a shell company for tax purposes.
Good luck with the venture Tom, I can see that you are trying to do this properly and saw straight away that there was something amiss with your partners suggestion.
If you haven't got an accountant yet general advice would be to go with word of mouth from other business owners as things like price charged are no indication of the quality of service that you will get.
I would advise you to join some breakfast clubs to get your name out there amongst the business community and that would be an excellent place to both talk with accountants and bank reps as well as find out which practices some of the other people there use and their thoughts on the service that they get.
All the best,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Thanks all for the replies. Your collective wisdom is much appreciated.
We've since had a word with HMRC who have pretty much pulled the rug out from under that idea so it's back to square one...proper chat with our advisor Thursday and HSBC penned in for Friday so we'll see how things look from there.
johnm - Be prepared, I may well pester you for further self storage information!!
Thanks all for the replies. Your collective wisdom is much appreciated.
We've since had a word with HMRC who have pretty much pulled the rug out from under that idea so it's back to square one...proper chat with our advisor Thursday and HSBC penned in for Friday so we'll see how things look from there.
Want a different answer. Just ask a different person at HMRC. lol... Actually, shouldn't jest, the same is true of bookkeepers and accountants. Darn this industry where six completely different answers can all be the right one!
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
As many have already stated, the parent VAT registered company wouldn't solve the problem anyway as it would just create a VAT merry-go-round. But since HRMC have vetoed the idea, you'll have to come up with something else now anyway.
I'm sure your bank manager could give you some good advice, failing that....i say go with Shamus's plan and just ring HRMC again and hopefully someone else comes up with a better answer than last time ;) I shouldn't say too much, as my sister works for HRMC!
HMRC rarely give an answer that is suitable as they do not know the whole picture of your circumstances and can only answer on what you tell them and even then they get it wrong.
VAT is a specialist area and you would be best to take advice from a VAT specialist in a firm of accountants.
Just a quick update on the above : plans were announced in the 2012 budget to introduce VAT on self storage charges. It's in the consultation phase at the moment but due to come into effect in the Autumn.
As Johnm states above, there are changes afoot in the area of VAT on self-storage. the gory details are here: http://www.hmrc.gov.uk/budget2012/tiin-4801.pdf http://www.hmrc.gov.uk/budget2012/vat-base-broad-4801.pdf
Since you last heard from me we've decided not to go ahead with it, and perhaps it was a good thing judging by what I've just read in those links.
After much research we found that we couldn't afford to make the business large enough so that it could reliably stay afloat and pay us more than the local paper boys...and we could really do without going bust after earning a pittance!
Thanks everyone for your measured and sensible replies.
