The Tax that causes business owners the most amount of confusion, is VAT.

In this article, our resident VAT expert, David Pegg, aims to debunk some of the myths and gain clarity around the VAT implications and your business.

Common Misconceptions of VAT

There is a common misconception that turnover for VAT registration purposes is measured over the Accounting Year, Tax Year or even Calendar year. That is not the case.

For VAT registration purposes, a business is required look at its’ “taxable” turnover over any, rolling, 12-month period. This is known as the “historical look”. Where that turnover equals or exceeds the turnover threshold, which is currently £85,000.00, then VAT registration is likely to be required.

I say “likely” because if it can be shown that the limit has been exceeded for exceptional reasons and will not continue at that level, then HMRC may grant the business an exception from registration. However, in either case, HMRC must be notified in writing that the threshold has been exceeded within 30 days.

A business must also consider whether its’ “taxable” turnover in the next 30 days alone will exceed the registration threshold and if so, it must notify HMRC and VAT registration will have immediate effect.

Benefits of Being VAT Registered

VAT registration can be beneficial for a business where its customers are VAT registered and able to recover any VAT charged. A business can register for VAT voluntarily even if the turnover is below the £85,000.00 threshold. A voluntary VAT registration can be back dated for up to 4 years.

It is only “taxable” income which must be considered for VAT registration purposes. So, this is any income which would (if registered) be subject to VAT at either 20%, 12.5%, 5% or 0%. Where all of a business’s income is taxable at 0% it is not required to register but must again notify HMRC and be granted an exception from registration.

Exporting and Importing Implications of VAT

One point to note is that the value of any services bought in from outside of the UK, which would be taxable if supplied in the UK, must be taken into account and added to UK taxable turnover. This determines the point at which VAT registration may be required.

VAT Exemptions

Taxable income excludes any supply which is “exempt” of VAT such as:

· The letting of residential property

· Most financial services

· Any transaction which is not “by way of business” such as unfettered grants and donations

There are currently two reduced rates of VAT- 5% and 12.5%.

The 5% rate applies to:

· Qualifying conversion services in converting commercial premises to residential or changing the number of qualifying dwellings in a building or changing the type of residential building, for example a house into an HMO or vice versa.

· The renovation of a dwelling or other qualifying residential building which has been empty for 2 years or more.

· Domestic fuel, power, and a range of other goods and services.

The 5% rate was also introduced as a measure to help the hospitality and leisure industries during the Covid pandemic and was increased to 12.5% on the 1 October 2021 and is due to return to 20% on the 1 April 2022.

Recovering VAT

As a general rule a business is entitled to recover VAT on its’ costs in the following circumstances:

· It is making, or intending to make, taxable supplies.

· The expenditure is for the purpose of the business and not just for the benefit of the business. This generally covers private expenditure and third-party costs.

· The business holds a valid tax invoice. The invoice must contain all of the details prescribed by HMRC in their published guidance and be correctly made out to the business concerned.

· The business has paid the cost in question. Where a business has not paid for a supply within 6 months then any VAT reclaimed must be repaid to HMRC.

· The expenditure is not in respect of goods and services where the VAT is specifically blocked- such as on the purchase of cars which are available for private use, and business entertainment costs (with the exception of overseas customers).

VAT which is incurred and which relates to an activity which is not “by way of business” is not recoverable.

VAT which is incurred, and which relates to a VAT exempt activity of a business, is generally not recoverable. However, where the VAT concerned is no more than £1875.00 in a quarter or £7500.00 in a VAT year and is no more than 50% of all input VAT incurred in the same period, the business may recover the VAT concerned. This is known as the “Partial Exemption” rules.

Special Schemes

There are a number of special schemes that a business may consider and apply for including:

· The Flat Rate Scheme- rather paying HMRC the difference between VAT on sales and that on purchases every month or quarter, a business can pay HMRC a set 5 of their VAT inclusive income and not recover any VAT on costs (except for VAT on capital costs). Can benefit some businesses but not so many since HMRC introduced the concept of the “Limited Cost Trader” with a mandatory Flat Rate of 16.5%.

· The Cash Accounting Scheme- allows a business to account for VAT on sales when payment is received rather than when invoiced. VAT on expenditure is also only recoverable when payment is made.

· The Second-hand Margin Scheme and Global Accounting Scheme- allows a business to account for VAT on any profit margin made rather than the full selling price.

Changes to VAT Post-Brexit

Since the UK left the EU there have been a number of fundamental changes to the VAT treatment of imports and exports of goods to the EU. Those changes are beyond the scope of this article, but some highlights are:

· VAT on imports may now be dealt with under the Postponed Accounting Scheme which allows a business to avoid having to pay VAT at the point of importation but instead account for it through their UK VAT returns. An importer also now required to obtain an Economic Operators Registration and Identification (“EORI”) number.

· Customs Duty may now be payable on goods entering from the EU where the preferential origin of the goods is from outside of the EU.

· A supply of goods to private consumers outside of the UK but within the EU will be taxed through either the “Non-Union One Stop Shop” or “Non-Union IOSS” schemes. VAT registration in at least one EU state may be required in some cases together with the appointment of a “Fiscal Representative”.

· An exporter of goods is also required to have a EORI number.

· Where a business is supplying goods on DDP terms then it may need to register for VAT in the country of destination to recover any VAT incurred on the importation.

· Northern Ireland is still regarded as a part of the VAT and Customs Union and as such a part of the EU as well as the UK. There are special rules governing the movement of goods to and from Northern Ireland.

The main issues we tend to encounter with businesses are:

· Failing to register for VAT at the right time-this can lead not only to arrears of VAT but also to quite punitive penalties.

· Moving or selling assets such as property or equipment without considering the VAT consequences in advance. This is particularly relevant when hiving up assets into a holding company, for example, where unexpected, and significant, VAT liabilities can be created.

· Claiming VAT on “blocked” expenditure or on costs which are more personal than business or not having the correct invoices to support a claim.

· Failing to understand the varied and complex new rules surrounding the movement of goods into and from the EU.

This article was written by David Pegg, our resident VAT expert. If you would like further information on any of the topics covered in this article, or if you would like to discuss VAT in relation to your own circumstances, we offer complimentary 1-2-1 consultation sessions. Please email: davidpegg@ormerodrutter.co.uk using the subject heading “VAT Made Simple Consultation”