Q. I need to get a high-end computer for my business which will cost about £2,200, but I use the VAT flat rate scheme for small businesses which doesn’t allow VAT reclaims. I’ve heard that I can claim back VAT charged on expensive items under the flat rate scheme, is that true?
A. Yes, under the flat rate scheme you can claim back VAT charged on the purchase of capital goods, which are items you will use in your business over a number of years. It must be a single purchase from one supplier with a VAT inclusive total of at least £2000, but that invoice can include several items bought together such as; screen, computer, and printer. The items must not be purchased for resale or for lease or hire.
The law on whether VAT must be charged on storage facilities changed from 1 October 2012. Before that date if you let out space for storage to individuals or businesses, that service could be exempt from VAT, if you had not elected for the whole building to be subject to VAT (AKA: ‘opted to tax’). Since October 2012, if you are VAT registered, you generally need to charge VAT at 20% on the supply of storage areas.
The Taxman has recently confirmed in a new VAT information sheet (10/13) that any let space which is used for storage carries 20% VAT, not just the lock and leave facilities marketed as ‘self-storage’. This could affect businesses who let out properties or unused parts of their buildings to others who use that space to store goods or materials. For example a farmer might let out surplus farm buildings on a temporary basis.
There are only a few exceptions to this new VAT rule. Those include where the space is let to a charity and it is not used for business purposes, and where the space is predominately used for an active purpose such as retail, and the storage is an ancillary activity.
It is the landlord’s responsibility to know how the let space is used and charge the relevant rate of VAT. If you have not charged VAT when you should have done for periods from 1 October 2012, you may need to correct this error in your next VAT return.
If your company makes a deliberate VAT mistake, which results in less VAT being paid over to HMRC than is correctly due, you as the director of that company can be issued personally with a penalty. This very rarely happens, but the VATman does have the power to impose such penalties where he can show the underpaid VAT was due to the dishonest conduct of one or more of the directors.
Two recent cases illustrate the types of situations where a personal penalty can be imposed:
Mr Brookes is the sole director of a building company. A VAT inspection found suppliers’ invoices to support VAT inputs were missing. Brookes obtained ‘copy’ invoices from the main suppliers, but those ‘copies’ were found to be very poor forgeries. Brookes was served with a personal penalty of £43,753 which was 60% of the over claimed VAT.
Mr & Mrs Walker failed to submit eight successive VAT returns for their company. The VAT office issued estimated VAT assessments to the company which were less than the VAT eventually found to be due, and the Walkers did not challenge those estimated assessments. The Walkers were served with personal penalties totalling £194,214.
It’s one number (£77,000 from 1 April 2012), so why is so easy to get it wrong? We are talking about the compulsory VAT registration threshold in the UK. If your VAT taxable turnover (sales) total for the previous 12 calendar months exceeds this compulsory registration threshold, or the sales you expect to make in next 30 days will exceed that threshold, you MUST register for VAT within the next 30 days.
You can now register for VAT online on the HMRC website, but we recommend that you talk to us first, as so many things can go wrong. If you make a mistake with the form, the Taxman may not let you correct it. For example:
- If you exceed the VAT registration threshold due to a ‘blip’ in sales, you can ask the VATman for permission not to register for VAT, but you must ask first and permission may not be granted.
- You can reclaim VAT on services you purchased for your business in the six months before the day your VAT registration is effective from, so it is essential to time your VAT registration date with an eye on the invoice dates for those expensive services. If the service relates to an asset which was no longer held at registration, the VAT can’t be recovered as pre-registration VAT.
- If you receive a large order which will push your sales over the VAT registration threshold for the next 30 days alone, pay attention to the delivery dates for that order. A staggered delivery for the order may mean you do not exceed the VAT threshold in the next 30 days, and you may register for VAT too early.
The requirement for a taxable person/business to register for VAT in the UK is included in the Value Added Tax Act 1994 (VATA 94).
The administration of VAT and registration is performed by HM Revenue & Customs (HMRC). For a simple VAT registration, form VAT1 (form VAT2 for partnerships) needs to be completed and submitted to HMRC. Details of registering and completing the registration form can be found in the VAT Notice 700/1, titled “Should I be registered for VAT?”
TYPES OF REGISTRATION
There are a number ways of registering for VAT, each one has been detailed below with a small example to help you decide the timing of your effective date of registration.
Compulsory VAT registration: The current VAT registration threshold is £73,000 from 1 April 2011 (previously £70,000). VAT registration threshold is usually increased annually, therefore to see if the threshold has been exceeded the annual change must be taken into account. There are two prescribed methods of determining the obligation to compulsorily register for VAT.
When working out a person’s taxable income, all income must be aggregated to determine the liability to register for VAT. There is anti-avoidance provision, known as disaggregation, which prevents businesses being artificially separated. In these circumstances HMRC looks at financial, economic or organisational links.
The first method can be simply described as the ‘looking back’ rule. Essentially, you look back at the previous 12 months to see if the taxable turnover has exceeded the registration threshold. Once the VAT registration threshold has been exceeded, HMRC must be notified by the end of the following month and registration by the beginning of the following month or earlier by mutual agreement.
A business commenced 1 April 2011 and supplies of £10,000 per month are made. The business does not wish to register for VAT until it is obliged to do so.
The registration threshold is exceeded in month eight, i.e. November 2011 (8 x £10,000 = £80,000). As the requirement to register was exceeded at the end of November, the business would therefore need to notify HMRC by 31 December and will be registered for VAT from 1 January 2012.
The second method can be simply described as the ‘looking forward’ rule. If you know that within the next 30 days that you will exceed the registration threshold you will have an obligation to register for VAT.
A business commenced 1 April 2011 and supplies of £10,000 per month. On the 21 June 2011 an order of £80,000 is placed and needs to be completed by the end of the month. As the registration threshold is exceeded notification needs to be made to HMRC by 20 July and the business needs to be registered from 21 June.
Voluntary VAT registration: There are a number of advantages for voluntarily registering for VAT. This is a way of improving the status of a company and for growing businesses registering for VAT earlier than required avoids any later registration penalties. This also allows a business to claim input tax on initial expenditure.
Intending trader registration: This method of registration is used by businesses prior to beginning to trade. HMRC need to be satisfied that a business intends to make taxable supplies and is entitled to be registered for VAT. If there are changes to the intention once the business is registered, the business must notify HMRC if its intention is no longer to make taxable supplies.
Exemption from VAT registration: An exemption is available for businesses that only make zero-rated supplies. Though not regularly used, these businesses are usually in a net VAT repayment situation. This exemption may be useful in situations where the administrative burden and cost would be greater than the actual VAT recovered.
Group Registration: Group companies under common control can apply for a group VAT registration. There are a number of advantages; intra-group transfers are ignored for VAT purposes. The group registration has to elect a representative member, who must account for the group Output tax and Input tax. This does not vindicate other group members of any liability as all members are held as jointly and severally liable.
To be included within a VAT group, members must be “bodies corporate”, establishments or fixed establishments in the UK and be under “common control”.
Further details can be found in VAT Notice 700/2
Divisional Registration: This type of registration is adequately described in the title, a divisional registration. This is a special type of registration available that provides some administrative advantages, though due to complexities it is not often used.
Further details can be found in VAT Notice 700/2
Though this guide is about registering for VAT, it is important to know the two main types of deregistration, compulsory deregistration and voluntary deregistration. There are a number of circumstances that will force a trader to be compulsorily deregistered. For current voluntary deregistration the threshold is £71,000 from 1 April 2011 (previously £68,000). Please note that the VAT deregistration threshold is usually increased annually.
Taxable turnover includes standard rated, zero rated, private use, reverse charge, self-supplies and acquisitions from other EU member states. Exempt and outside the scope supplies do not need to be included.
Another category of sales that would bring a supplier to become liable to UK VAT is ‘Distance Selling’. This is where supplies are made from another EC country directly to a non-VAT registered entity, a typical example is a mail order business. The threshold to note here is £70,000, distance sales to the UK exceeding this threshold will require the business to register for UK VAT, the option of earlier voluntary registration is also available.
PRE-VAT REGISTRATION EXPENSES AND ADMINISTRATION
One of the key questions businesses ask in VAT registration situations is regarding pre-registration input tax recovery.
There are separate rules for goods and services. For goods to qualify for input tax recovery they must have been purchased for the purposes of the business and not supplied onwards or consumed before the date of registration, and finally the VAT must have been incurred within three years of the date of registration.
For services for qualify, the cost must have been incurred for business purposes and the VAT must have been incurred within six months of the date of VAT registration.
In both situations the input tax recovery is subject to being supported by an appropriate VAT invoice. Also, the input VAT would be claimed through the businesses first VAT registration.
Output VAT only needs to be accounted for from the date of VAT registration. VAT invoices cannot be issued until a VAT registration number has been issued. This can present businesses that are waiting for their VAT registration number with an administrative issue. The general practice is to issue invoices ‘gross’ with the legend ‘VAT registration number applied for’. The invoice must not show a VAT amount on the invoice.
Once a VAT number is attained, invoices issued with the legend mentioned above would need to be re-issued correctly displaying the VAT amount.
FAILURE TO NOTIFY
Failure to register your business on time or to notify HMRC of your liability will result in a penalty. The penalties regime has been reconstructed and is effective for periods commencing 1 April 2009. For further details on the new penalties regime, please refer to ACCA’s ‘Guide to…The New Penalties Regime’:
A trader may wish to challenge the penalty with a reasonable excuse. However, HMRC has stated that a lack of funding or reliance on a third party will not be accepted as reasonable excuses.
UNDERSTANDING THE FLAT RATE SCHEME
As an overview, the Flat Rate Scheme allows you to apply a single percentage to your turnover to work out your VAT liability. This is one amongst a number of schemes offered by HM Revenue & Customs (HMRC) aimed at easing the administrative burdens small businesses face.
The scheme provides a number of advantages, such as:
- the simplicity of the scheme, removing some administrative burdens
- no partial exempt calculation needs to be performed
- no fuel scale charge needs to be paid for businesses paying road fuel.
- HMRC offer a 1% discount for new VAT registered businesses under this scheme (the discount only applies to the first year of registration)
HMRC produce a ‘Ready Reckoner’ to see how using the scheme will affect your business, this can be found at: http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm
Please note that this scheme can be used by partially exempt businesses, and with ‘Annual accounting scheme’. The Flat Rate Scheme has its own versions of a cash accounting and retail scheme, but is not applicable to margin scheme, retail scheme and cash accounting scheme users.
Eligibility for the scheme
A business is eligible for the scheme providing both the following two tests are satisfied.
Test 1 is the value of your taxable supplies in the next year does not to exceed £150,000 excluding VAT ignoring the sale of capital assets but include:
- standard, reduced and zero rated supplies.
- sale of second-hand goods sold outside the margin scheme
- sale of investment gold detailed in the VAT Act Section 55 (see VAT Notice 701/21 Gold for further details)
Test 2 is the value of your taxable supplies in the next year does not to exceed £191,500 including VAT ignoring the sale of capital assets but include:
- all the items included for Test 1
- the value of exempt supplies (such as rent, lottery commission, bank interest etc.)
- any other income received or receivable (such as non-business etc.)
The scheme can be used until your total turnover exceeds £230,000 excluding ‘one-off’ increases in sales (which need to be notified to HMRC in order to remain in the scheme This must be checked on the anniversary of joining the scheme. If you are aware that within the next 30 days the threshold of £230,000 will be exceeded you will have to leave the scheme.
There are also a number of other restrictions to joining the scheme, you cannot join the scheme if:
- you are not VAT registered
- you use the second-hand margin scheme or the auctioneers’ scheme
- you are required to use the tour operators margin scheme
- you are required to use the Capital Goods Scheme
- you have stopped using the Flat Rate scheme in the previous 12 months
- you have accepted a compound penalty offer or been convicted of an offence in connection with VAT in the last 12 months;
- you have been assessed to a penalty for conduct involving dishonest conduct in the last 12 months;
- you have been registered for VAT in a VAT Group in the last 24 months
- you have been registered for VAT in a VAT division in the last 24 months
- you have been eligible for a VAT group registration in the last 24 months
- your business is ‘associated’ or closely linked with another business within the last two years
APPLYING FOR THE SCHEME
The scheme does not automatically apply, application is made by completing and submitting form VAT 600FRS:
The application form has to be sent to:
National Registration Service
HM Revenue & Customs
77 Victoria Street
The application form can also be submitted by email to: firstname.lastname@example.org
If you are also registering for VAT, the form VAT 600FRS can be submitted with the VAT registration form VAT1. In addition a business can join the ‘Annual Accounting Scheme’ together with this scheme, please see the ‘Guide to The Annual Accounting Scheme’ for further details.
The Flat Rate Scheme will usually begin from the next VAT period following the receipt of the application form. Applying the scheme to an earlier period must be agreed with HMRC. HMRC will notify you when your business can start using the scheme.
If you wish to leave the scheme notice must be made in writing to the Annual Accounting Registration Unit.
USING THE SCHEME
Calculating the Flat Rate percentage
The key issue with this scheme is determining the appropriate flat rate percentage. HMRC have recommended a four step process in order to establish the correct percentage.
- Step 1 – Review the table of flat rates percentages and see if your business is mentioned
- Step 2 – Re-review the table making sure that your business is not mentioned in a composite sector
- Step 3 – If your sector is not mentioned look at the Businesses not mentioned elsewhere
- Step 4 – Finally If you are still unsure then phone the National Advice Service on 0845 010 9000
The choice you make should be on a sensible and reasonable basis, evidence should be retained as to why a particular choice was made. This could help prevent issues later if HMRC were to challenge the rate used.
If your business looks like it fits into two or more sectors, the percentage of your main business activity (by reference to turnover) should be used. If this balance of business activity changes, continue using the current percentage for the remainder of the VAT year and then change the percentage used if appropriate.
Where a business activity starts or stops the same review needs to be done in addition to checking that this change does not make your business ineligible for the scheme. Any change in flat rate percentage must be notified to HMRC within 30 days of the change or to: Enquiries.email@example.com
Calculating the turnover
The next step is applying the percentage to your turnover, which includes:
- VAT inclusive sales and takings of standard rated, zero rates and reduced rate supplies
- Exempt supplies (such as rent or lottery commission)
- Supplies of capital expenditure goods unless they are in relation to goods where the VAT has been calculated outside the flat rate scheme
- Despatches to other European Commission countries
Amounts excluded from turnover are:
- Private income
- Proceeds from the sale of goods you own but not used in the business
- Sales of gold detailed in the VAT Act Section 55 (see VAT Notice 701/21 Gold for further details)
- Non-business income and supplies outside the scope of UK VAT
- Sale of capital expenditure on which input tax was claimed
Without confusing matters, your business will have to determine how the turnover is calculated as there are three ways of calculating your turnover.
- Basic turnover – Mainly for businesses that deal with other VAT registered businesses.
- Cash based turnover – Similar to the Cash Accounting Scheme, the turnover is on a cash received basis.
- Retailer’s turnover – Similar to the retail scheme, used mainly for businesses that sell goods to the public.
Care must be taken if you have any special circumstances to your business, if you buy or sell goods/services within or without the EU, partially exempt business, fuel scale charges, sales of second-hand margin goods and if you act as an agent. In addition, there are special rules for business like florists and Barristers.
The scheme allows for capital expenditure, subject to rules, to be treated outside the scheme. Effectively, the input tax on a capital purchases costing more than £2,000 (including VAT) can be claimed in the normal manner, i.e. through box 4 of the VAT return. The expenditure must be for more than one purchase, over £2,000 and not for a service to qualify. An apportionment must be performed on capital items with a private use element.
To mirror the input tax treatment, if input tax was claimed on the purchase of a capital item, output tax must be charged on the sale. If the capital item was within the flat rate scheme, as for example it cost less than £2,000 then there is no output tax accountable on the sale.
Record keeping and administration
In regard to record keeping, the requirements relate to the flat rate turnover, details of the percentage used and how the tax was calculated. Additional requirements relate to certain capital expenditure in excess of £2,000 in value.
VAT invoices must still be issued for VAT registered customers. The rate of VAT on these invoices should be the appropriate rate of VAT and not the Flat rate percentage. Care must be taken when calculating your VAT liability, the calculation is based on the VAT inclusive total.
Care must be taken when completing the VAT return, as the normal rules are not followed. The differences are:
- Box 1 – this will contain the flat rate scheme amount payable. In addition there maybe output tax on certain capital goods.
- Box 2 – standard rated VAT on goods bought from other EC countries
- Box 3 – completed in the normal way
- Box 4 – this will normally be zero unless there have been capital goods purchased. In addition you can recover VAT on stocks and assets held at registration
- Box 5 – completed in the normal way
- Box 6 – the VAT inclusive amount is included. In addition supplies outside the scheme should be added as excluding VAT
- Box 7 – this will normally be zero unless there have been capital goods purchased or acquired goods from other EU countries
- Box 8 & 9 – completed in the normal way
The accounts for your entity need to be compiled using gross amounts. It is normal practice for the flat rate VAT due to be included as a deduction from the turnover figure. This is then disclosed by way of a ‘Turnover’ note to the accounts, for example:
“Turnover shown in the profit and low account shall exclude either VAT on taxable outputs or VAT imputed under the flat rate scheme.”
Alternatively the Flat rate VAT can be shown as a separate expense item within the Profit and Loss account.
Further details can be found on the HMRC website, as a source of reference please refer to the VAT Notice 733.
If the previous business was VAT registered it can pass its VAT number on to the new company under the transfer of going concern rules (TOGC). However, this is not always advisable as the VAT number will carry with it all the ‘history’ of the old business, including defaults for late payment and error records. If the owners of the new company are not exactly the same people as those who owned the old business, the new owners may not want to take on the VAT ‘sins’ of the old business.
In this case the new company will have to apply for a new VAT number. This is the same procedure as a new VAT registration, and penalties will apply if it is not done on time.
If you want the new company to adopt the VAT number of the unincorporated business you must inform the Tax Office of the change in structure of the business within 30 days. If this deadline is not met the Taxman will impose a ‘failure to notify’ penalty which could be up to 100% of the VAT due, even where all the VAT due has been paid on time.
UNDERSTANDING THE ANNUAL ACCOUNTING SCHEME
As an overview, the Annual Accounting Scheme allows you to complete just one VAT return per year. The VAT is paid in instalments, thus avoiding a VAT liability at the end of the year. This is one amongst a number of schemes offered by HM Revenue & Customs (HMRC) aimed at easing the administrative burdens small businesses face.
The scheme provides a number of advantages, such as:
- less administrative burden by only requiring the submission of one VAT return per annum
- a cash flow advantage as the instalments can be smaller than the larger quarterly payments
- a longer time limit for submitting your annual VAT return is two months.
Please note that this scheme can be used together with ‘Cash accounting scheme’ and the ‘Flat rate scheme’. Repayment traders can enter the scheme, though it would generally put them at a cash flow disadvantage as they will only receive a repayment once a year. In addition, the scheme can be used with other retail schemes, margin schemes, Tour Operators Margin scheme and for partially exempt businesses.
Eligibility for the scheme
A business is eligible for the scheme providing you expect the value of your taxable supplies in the next year not to exceed £1,350,000.
The previous restriction of waiting for one year before registering under this scheme for newly registered businesses with taxable turnover exceeding £150,000 has been removed from 1 April 2006.
The taxable supplies figure is the total of your standard, reduced and zero rated supplies excluding VAT. For this purpose, exempt supplies or sale of capital assets can be ignored. If you exceed the threshold for the scheme, provided that the estimates were made on reasonable grounds, HMRC will not levy a penalty.
The scheme can be used until your taxable supplies including the disposal of stock and capital assets does not exceed £1,600,000. Once this figure has been exceeded, excluding ‘one-off’ increases in sales, you will have to leave the scheme at the end of your current tax period.
You cannot joint the scheme if:
- you are part of a VAT group or divisional registration
- you have stopped using the annual accounting scheme in the previous 12 months
- you have an increasing VAT debt, unless it is small and have agreed with HMRC to clear it
- you are insolvent
APPLYING FOR THE SCHEME
The scheme does not automatically apply, application is made by completing and submitting form VAT 600AA. This application form can be obtained from the following:
The application form together with a direct debit mandate (if applicable) has to be sent to:
Annual Accounting Registration Unit
62-70 Tettenhall Road
Please note that if you wish to join the ‘Flat Rate Scheme’ as well as this scheme there is a joint application form available, which is submitted to the address mentioned above. The joint application form can be obtained from the following:
When joining the scheme, the start date will be usually be from the beginning of the VAT period in which the application to enter the scheme has been made. Unless the application has been applied for later within the VAT return period, the proceeding period marks the entry into the scheme. This is better demonstrated by examples.
The VAT quarter starts 1 May and ends 31 July. An application to enter the scheme was approved on 1 June, therefore the annual VAT return starts from 1 May. The annual accounting year ends 30 April.
The VAT quarter starts 1 May and ends 31 July. An application to enter the scheme was approved on 27 July, as the VAT return for that period will have already have been issued the annual VAT return will start from 1 August. The annual accounting year ends 31 July.
The accounting year end can be changed by request, which leads to shorter period VAT returns.
If you wish to leave the scheme notice must be made in writing to the Annual Accounting Registration Unit.
USING THE SCHEME
The mechanics of the scheme is to allow you to make usually 9 interim payments. Then a balancing payment is made together with the submission of the VAT return, 2 months after the VAT year end.
The nine instalments are calculated as 10% of your last VAT returns liability. They are paid in month 4 through to month 12. The final payment would be submitted with the VAT return two months after the VAT year end, i.e. month 14.
Quarterly instalments can be requested, however, the default position is monthly. Each quarterly instalment will be 25% of last years VAT return liability. Quarterly instalments are paid in month 4, 7 and 10. The final payment would be submitted with the VAT return two months after the VAT year end, i.e. month 14.
If the instalments are incorrect, too low, too high, or your business changes, amendments to the payments can be made. In addition, extra voluntary payments can be made. Any request for a change must be informed to the Annual Accounting Registration Unit.
The conditions of using the scheme are
- interim payments are made by the date notified by HMRC
- interim payments are made by either Direct Debit, Standing Order or other electronic means
- the annual VAT return and the balancing payment are sent by the date shown on the VAT return
Record keeping and administration
In regard to record keeping, the same rules apply as to all VAT registered businesses, details of which can be found in VAT Notice 700/21.
Further details can be found on the HMRC website, as a source of reference please refer to the VAT Notice 732, produced by HM Revenue & Customs (HMRC).
Once you understand the basics, VAT is reasonably straightforward. But there are some areas where it is easy to make mistakes. These can lead to stringent penalties, and ignorance is no defence. In this briefing, we assume you understand the basics and concentrate on some of the more unexpected pitfalls. It covers:
- Timing and paperwork problems.
- Unreclaimable VAT.
- Exceptions for unusual supplies.
- Where to get help and advice.
1. Getting the timing right
Timing is crucial. Generally every transaction must be shown in your VAT return if the ‘tax point’ (the point at which VAT is accountable) falls within that particular VAT return period, whether or not payment has been received.
1.1 The tax point is usually the date goods were supplied or services completed (the ‘basic tax point’). There are some variations.
- If a VAT invoice is issued or payment is made before the basic tax point, the date of invoicing or payment becomes the tax point, whichever is the earlier.
- If you issue a VAT invoice up to 14 days after the basic tax point, the date the invoice was issued becomes the tax point. It is possible to agree an extension to the ’14-day rule’ by making an application to HM Revenue & Customs (HMRC).
- If you receive a VAT invoice up to 14 days after the basic tax point, you can assume the invoice date is the tax point, unless the invoice shows a separate tax point date.
- With continuous supplies, the tax point occurs when a VAT invoice is issued or payment is made — whichever is earlier.
1.2 As a buyer, you cannot reclaim the input VAT you paid without a valid VAT invoice.
- If you pay your supplier in advance, you cannot reclaim the VAT element of the payment without a valid VAT invoice.
- If you reclaim input VAT on a supplier’s invoice, but fail to pay the supplier within six months you normally have to repay the VAT.
1.3 Relief is available for bad debts.
- The invoice must be more than six months overdue and be written off in a specific VAT bad debt account.
- Customers no longer need to be told that bad debt relief claims are being made.
1.4 In practice, many small businesses use the cash accounting scheme.
- VAT returns are based on payments made and money received during the period, regardless of where the tax points fall.
- Generally, any business with an estimated VAT taxable turnover of up to £1.35 million can apply to join.
1.5 The flat-rate scheme allows small firms to calculate the net VAT they owe by applying a flat-rate percentage to their turnover.
- The flat-rate percentage depends on your trading sector, so if your net VAT payments are generally a low percentage of turnover this scheme may not be of benefit.
- Tax invoices must still be issued, but will not be used to calculate the VAT payable.
- To join the scheme, estimated VATable turnover (excluding VAT) must be no more than £150,000.
1.6 With the annual accounting scheme only one VAT return is submitted each year. Nine monthly interim VAT payments are made based on an estimate of the total annual VAT bill. A balancing payment is made when the annual return is submitted.
- Any business under the threshold of £1.35 million can apply to use the scheme from the date of VAT registration.
- The leaving threshold is £1.6 million.
2. Getting the paperwork right
2.1 Proper VAT invoices must be issued for supplies to VAT-registered businesses.
- A full VAT invoice should include a unique identifying number; the supplier’s name, address and VAT number; the customer’s name and address; the invoice date; the tax point (if this is different from the invoice date); the type of supply (such as sale or rent); a description of and the amount of goods or services supplied; unit price; any cash discount rate; the VAT rate; the total excluding VAT; the VAT amount and the total payable.
- VAT invoice numbers must be sequential, with no unexplained gaps.
- Duplicate invoices must be clearly marked.
- If you issue other documents (eg pro-forma invoices), which show the same details, they must clearly state ‘Not a VAT invoice’.
2.2 If you make retail sales under £250 (including VAT), you can issue customers with a ‘less detailed’ VAT invoice.
- This must show your name; address; VAT number; the date of supply; a description of the supplies; the amount (including VAT) and the VAT rate charged.
2.3 To reclaim the input VAT paid to suppliers, VAT invoices must be retained.
- If you lose a VAT invoice, you must get a duplicate invoice from your supplier.
- If an invoice shows product codes rather than descriptions, you must also keep a copy of the supplier’s product list.
2.4 If you settle an invoice on behalf of a third party, you cannot reclaim the VAT charge.
- Input VAT can only be reclaimed by the recipient of the supply.
- Consider settling the net value only. It may be worthwhile for the third party to pay the VAT portion of the invoice and then reclaim it in their own right.
2.5 Watch out for arithmetical errors.
- If you are given an invoice which does not show VAT as a separate item, confirm the items are VATable and check what you can reclaim by multiplying the amount on the invoice by 1/6, not by 20%.
2.6 If you sell your business, the buyer can apply to retain your VAT registration number. However, this would make the buyer liable for any past tax overdue, so they may prefer to set up a new VAT registration.
- Unless the buyer is retaining your VAT number, you must retain their VAT records. In this case, the buyer must be given full information so they can comply with their VAT duties.
3. Discounts and part exchange
3.1 Discounts can be problematic. The VAT payable on a supply depends on how the discount is offered.
- If an unconditional discount (such as a trade discount) is given, the VAT is based on the discounted value of the full sale.
- The same applies for prompt payment discounts — even if the customer does not pay promptly.
3.2 VAT is calculated on the full value of any part-exchange or barter transactions.
- VAT must be calculated as if the transaction had been entirely for cash (ie purchases and sales at the full price). VAT invoices must be issued accordingly.
4. Irreclaimable tax
4.1 Input VAT cannot be reclaimed on supplies for personal (non-business) use.
- If goods or services are bought for both business and non-business use, the input VAT may be apportioned with only the business element recovered, subject to the normal rules. Or, recovered in full on the entire purchase of goods provided output VAT is declared on a self-supply of the non-business element.
4.2 Input VAT can be reclaimed on some of the supplies made to employees including on:
- The actual costs of employees’ subsistence when travelling on business (excluding any flat-rate expenses).
- Any free meals that may be provided.
- VAT can also be reclaimed on the cost of business mileage paid to employees using their own vehicles. See VAT Notice 700/64 for the calculation that must be used.
Generally VAT cannot be reclaimed on any free accommodation that is provided. However, if employees have to be given domestic accommodation wholly for a business purpose HMRC may agree to VAT claims being made.
4.3 There are strict rules applied to sole traders, partners or directors.
- They cannot reclaim VAT on free meals at work, but subject to normal rules can claim for subsistence expenses while on business trips.
4.4 The treatment of entertainment varies, according to who is being entertained.
- VAT on business entertainment for third parties can never be reclaimed.
- Reclaims may be allowed for VAT related to staff entertainment. The entertainment must have a discernible business purpose.
- Where the entertainment is for both employees and outsiders, it may be possible to reclaim some VAT.
4.5 Generally, a business cannot reclaim VAT on supplies purchased in order to make exempt sales.
- Small amounts may be reclaimed if within certain set limits. The calculation of recoverable VAT in this instance is complex. Get expert advice.
5. Overseas VAT issues
5.1 Imports of goods from another EU country (‘acquisitions’) will generally be free of any VAT charge.
- The supplier must show the customer’s UK VAT number on their sales invoice.
- UK output VAT must be self-charged and declared in Box 2 of the relevant VAT return covering the date of the supply (known as acquisition tax). However, as long as the purchase is used to make VATable supplies the Box 2 VAT can be reclaimed as input VAT in the same return.
5.2 Imports of goods from outside the EU attract import VAT, at UK rates, which is payable on entry. Subject to the normal rules this can be reclaimed as input VAT. The import may also attract customs duty which is also collected by HMRC.
- Customs duty is not recoverable.
- To reclaim import VAT, a VAT certificate C79 must be held.
- Payment of both import VAT and duty can be deferred which can speed through entry of goods into the UK.
5.3 Exports of goods to VAT-registered buyers in other EU countries (‘dispatches’) can usually be zero-rated.
- VAT should be added to sales invoices if a customer is not VAT-registered or a valid domestic EU VAT number is not quoted on the invoice. Such sales could give rise to EU registration requirements if sales volumes exceed local limits.
5.4 Exports of goods to countries outside the EU are zero-rated.
- VAT will be due on the sale unless evidence is held that the goods have left the UK within specified time limits.
5.5 Trade with the EU requires extra information to be provided.
- Total dispatches and arrivals are required in boxes 8 and 9 of the VAT return.
- Details of zero-rated supplies to VAT-registered EU customers must be declared on a separate EC Sales List.
- Additional Intrastat returns are required if the value of arrivals in a calendar year exceeds £600,000 or the value of dispatches exceeds £250,000.
6. Watch out
VAT must be charged in a number of familiar situations outside the normal run of business.
6.1 Business gifts are usually treated as though they have been sold as VATable supplies, with output VAT due on the value. There are some exceptions.
- There is no output VAT due on individual free samples given to customers.
- One-off business gifts costing less than £50 (excluding VAT) do not attract output VAT. The £50 limit applies to all gifts made to the same person within a 12 month period.
- Gifts of services are not normally liable to VAT.
- Gifts of goods to charities for sale or export are zero-rated.
6.2 As a general rule, VAT must be charged on all sales to employees.
6.3 If you take items for personal use on which you have accounted for VAT, this counts as a sale (see 4.1).
- If you pay nothing, VAT is charged on the cost (normally the market cost).
- Special rules apply to cars and fuel.
6.4 The sale of business assets is normally treated in the same way as any other sale.
6.5 The sale of a business as a going concern may be VAT-free. Specific rules apply.
7. Help and advice
7.1 Include VAT records as part of your regular review with your accountant.
7.2 Ask your VAT adviser how your business is affected by VAT rules. It is always advisable to check the VAT implications of a situation and the options available to you.
7.3 If doubts remain, you can safeguard your position by getting a decision in writing from HMRC. Contact the HMRC National Advice Service (0845 010 9000 or www.hmrc.gov.uk).
- HMRC will only be bound by any ruling if all the facts have been disclosed.
Post and packaging
- A. Provided the contract is for ‘delivered goods’, charges are usually taxed at the same rate as the product even if you show a separate charge on your price list or invoice.
- If UK delivery is offered as an optional extra, VAT will be due on the charge.
- If the goods are for export, or leave from outside the UK, you should take advice.
- B. Packaging is normally taxed at the same rate as the contents.
- If you make a separate charge for packaging, this will always attract VAT.
- C. The treatment of bundled supplies depends on whether there is a mixed or composite supply.
- Mixed supplies may contain components liable to different VAT rates.
- You work out the total VAT liability in proportion to the value of each component.
- Composite supplies have one VAT liability based on the main component.
Tax yes, VAT no
One problem is the gap between what the VAT rules allow a business as expenditure and the rules applied for other taxes. In general, any expenditure ‘wholly and exclusively for business purposes’ is deductible for direct tax purposes.
Before you can reclaim input VAT, expenditure must be directly attributable to the VATable supplies you are making. Your supplies might be VATable at the standard, reduced, or zero rates of VAT, or be services that are outside the scope of the tax but with VAT recovery rights (ie not exempt). If you cannot attribute your expenditure to the VATable supplies you are making, there will be a VAT cost due.
Note: HMRC are moving to compulsory online filing for VAT from April 2012. All VAT payments will also have to be made electronically.