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VAT is on the face of it a simple tax for many businesses.  VAT is charged on sales at the appropriate rate and declared on a quarterly (or monthly) VAT return.  The VAT that has been charged by suppliers is also recorded on the VAT return.  The difference between the VAT on Sales (output tax) and Cost (input tax) is then the VAT due to be paid to HMRC (or refunded if input tax exceeds output tax).  A business must be VAT registered if turnover exceeds the threshold (from 1 April 2017 £85,000 per annum sales) and can be registered voluntarily (i.e. if it would be better off doing so).

VAT registration is completely separate from company status.  However note that if registration is not beneficial then it can be delayed by transferring trade to a limited company.  This resets the turnover figure for the purpose of the registration test, only if the unincorporated trade had not already exceeded the limit.

What VAT schemes are available?
The most common schemes for small businesses are:

  1. Flat rate scheme – can save money and simplify VAT; applicable for turnover up to £150,000;  must be applied for and agreed by HMRC before being used.
  2. Cash Accounting – can delay payment of VAT to HMRC to match receipts from customers and payments to suppliers; applicable up to £1,350,000; can increase accounting complexity.
  3. Retail schemes – can simplify the record keeping for retailers.  Various schemes available.
  4. Partial exemption.  This is not really a scheme but a VAT status.  This occurs if some of a business’s income is exempt from VAT (such as certain rents).  Calculations are then needed to establish if some or all VAT on costs is blocked from being reclaimed.

What can I reclaim VAT on?

To reclaim VAT you must have a VAT invoice which shows, amongst other things, your business name, the VAT number of the supplier and the VAT amount.  The invoice can be made out to an employee for subsistence and petrol expenses.  No invoice is required for telephone or parking charges less than £25.

You cannot reclaim non-UK VAT on your UK VAT return.  Also VAT that has been incorrectly charged cannot be reclaimed.  Only VAT on business supplies used in the business can be reclaimed.

The following items do not have VAT charged on them and therefore there is no VAT to reclaim:  train tickets, insurance, stamps at a post office, most books, bank charges, interest, salaries, any purchases from a non-VAT registered person or business.

VAT on cars and entertainment costs cannot be reclaimed.

Pre-registration VAT can be reclaimed if it meets certain criteria.  This applies to VAT on services bought in the six months prior to registration and goods purchased in the three years prior to registration and still owned at the point of registration.

What potential VAT pitfalls should I be aware of?

There are many possible problems that businesses can face with VAT.  This web page can only give a few of the most common ones that we see.

  1. Gift of assets.  If VAT was reclaimed on an asset then when that asset is given away (e.g. to a different business under common control) then VAT must be declared as if the asset was sold.
  2. Claiming VAT when incorrectly charged.  For example if your supplier charges you full rate when the supply should be reduced rate (e.g. solar panels on residential property) then you must ask the supplier to re-invoice you as you cannot reclaim the VAT overcharged even if the supplier pays this amount to HMRC.
  3. Your VAT return must agree or reconcile to your balance sheet.  If you are cash accounting then the VAT on debtors and creditors must be calculated in order to make the reconciliation.
  4. VAT on pre-registration expenditure can only be reclaimed if you have VAT invoices.
  5. Flat rate scheme can be applied for at the point of registration and VAT on pre-registration expenses still reclaimed.
  6. If selling all or part of a business the VAT implications must be considered very carefully.  If all criteria are met for the sale to be a “transfer of going concern” then no VAT must be charged, otherwise VAT must be charged.  Charging or not charging is not optional and can be very expensive if this is not handled correctly

What are the UK-VAT implications cross border transactions?

This is a complex area and the following points are brief guidelines only.  For goods sold to a customer outside of the UK it is likely to be a VAT transaction with a VAT rate of 0%.  If the sales is to the EU these will be included on box 8 of the VAT return and on the EC Sales list if the customer is based in the EU.

For services the basic rules are:

  • For business to business sales the sale is at the place of the customer.  If the customer has no UK presence then the transaction will be outside of the scope of UK VAT.  No VAT is charged and the sales is not recorded anywhere on the VAT return.  The sale is included on the EC Sales list.
  • For sales to non-business customers the sale takes place at the place of the supplier.  A UK business supplying services to any non-business customer must charge UK VAT regardless of the location of the customer, with the exception of certain services including advertising.

These basic rules have exceptions, or special rules, for services relating to land, transport, cultural, educational and entertainment services, hiring of goods, broadcasting and electronically supplied services.

The currency that an invoice is raised in does not affect the VAT status.

Should I charge VAT on expenses recharged to my customer?

Yes.  If you are charging your customer for goods or services, and add expenses, then you must charge VAT on the whole amount.  This is so even if you are recharging postage or train fares which are normally zero rated (because zero rating only applies to the Post Office and train companies respectively).  It doesn’t make any difference whether you are charging exactly the cost amount to your customer, or a different amount, for the expenses.

If you are passing on a disbursement then you do not charge VAT on this.  A disbursement is where the cost was that of your customer but you happen to pay for it. In effect you have loaned your customer some money and are being repaid it.  For example, when Green Accountancy file an annual return at Companies House we pay the filing fee on behalf of the company.  We then reclaim this from the company as a disbursement with no VAT.