e30ca542 508b 448f afa9 67a2c564ff69 800x380 - Definition of VAT partial exemption

Definition of VAT partial exemption

A business that incurs expenditure on taxable and exempt business activities is partially exempt for VAT purposes. This means that the business is required to make an apportionment between the activities using a 'partial exemption method' in order to calculate how much input tax is recoverable.

HMRC’s guidance explains that as a VAT-registered business, you can recover the VAT on your purchases which relate to taxable supplies that you make or intend to make. There are some items where input tax recovery is ‘blocked’. Supplies that are made outside the UK that would be taxable if in the UK and certain exempt supplies to non-UK customers also give the right to recover VAT, but there are special rules. In principle, you cannot recover VAT that relates to any exempt supplies, although you may be able to if the VAT is below certain limits.

There are a number of partial exemption methods available. The standard method of recovering any remaining input tax is to apply the ratio of the value of taxable supplies to total supplies, subject to the exclusion of certain items which could prove distortive. The standard method is automatically overridden where it produces a result that differs substantially from one based on the actual use of inputs. It is possible to agree a special method with HMRC. The VAT incurred on exempt supplies can be recovered subject to two parallel de-minimis limits.

Source: HM Revenue & Customs Tue, 08 Mar 2022 00:00:00 +0100
4b1b1e71 2902 42d8 989f b8d3b65dc7bd 800x380 - Revoking VAT option to tax land and buildings

Revoking VAT option to tax land and buildings

There are special VAT rules that allow businesses to standard rate the supply of most non-residential and commercial land and buildings (known as the option to tax). This means that subsequent supplies by the person making the option to tax will be subject to VAT at the standard rate.

The ability to convert the treatment of VAT exempt land and buildings to taxable can have many benefits. The main benefit is that the person making the option to tax will be able to recover VAT on costs (subject to the usual rules) associated with the property including the purchase and refurbishment of the property.

However, any subsequent sale or rental of the property will attract VAT. Where the purchaser or tenant is able recover the VAT charged this is not normally an issue. However, where the purchaser / tenant is not VAT registered or not fully taxable (such as bank) the VAT can become an additional (non-recoverable) cost.

Once an option to tax has been made it can only be revoked under limited circumstances so proper consideration of the issue is important. This includes:

  • within a specified 'cooling off' period in the first 6 months,
  • an automatic revocation where no interest has been held for more than 6 years, and
  • after 20 years has elapsed.
Source: HM Revenue & Customs Tue, 08 Mar 2022 00:00:00 +0100
61e185ca cdc0 48c1 957b 4d555727c283 800x380 - Range of supplies affected by VAT reverse charge

Range of supplies affected by VAT reverse charge

The VAT domestic reverse charge accounting mechanism was put in place to help prevent criminal attacks on the UK VAT system by means of sophisticated fraud.

The domestic reverse charge procedure applies to the supply and purchase of the certain specified goods and services.

The specified goods that the reverse charge applies to are:

  • mobile phones 
  • computer chips 
  • wholesale gas 
  • wholesale electricity 

The specified services are:

  • emission allowances 
  • wholesale telecommunications 
  • renewable energy certificates 
  • construction services 

Under the domestic reverse charge rules, it is the responsibility of the customer, rather than the supplier, to account to HMRC for VAT on supplies of the specified goods or services. It should be noted that there are exceptions within each category, and it is important to check carefully if the domestic reverse charge is required on a transaction or not. 

The domestic reverse charge should not be confused with reverse charge for cross-border services which applies to certain services from abroad. 

Source: HM Revenue & Customs Tue, 01 Mar 2022 00:00:00 +0100
9c4904df 6235 4b69 99c6 3470e1594e78 800x380 - MTD for VAT - digital records required

MTD for VAT – digital records required

The MTD for VAT regime started in April 2019 when businesses with a turnover above the VAT threshold of £85,000 became mandated to keep their records digitally and provide their VAT return information to HMRC using MTD compatible software.

From April 2022, MTD for VAT will be extended to all VAT registered businesses with turnover below the VAT threshold of £85,000. Many businesses with turnover below the VAT threshold have already voluntarily chosen to use MTD for VAT.

If you are using MTD for VAT or will soon begin to do so, here is a reminder of the records you must keep digitally:

  • your business name, address and VAT registration number
  • any VAT accounting schemes you use
  • the VAT on goods and services you supply, for example everything you sell, lease, transfer or hire out (supplies made)
  • the VAT on goods and services you receive, for example everything you buy, lease, rent or hire (supplies received)
  • any adjustments you make to a return
  • the ‘time of supply’ and ‘value of supply’ (value excluding VAT) for everything you buy and sell
  • the rate of VAT charged on goods and services you supply
  • reverse charge transactions – where you record the VAT on both the sale price and the purchase price of goods and services you buy
  • your total daily gross takings if you use a retail scheme
  • items you can reclaim VAT on if you use the Flat Rate Scheme
  • your total sales, and the VAT on those sales, if you trade in gold and use the Gold Accounting Scheme

You also need to keep digital copies of documents that cover multiple transactions made on behalf of your business by:

  • volunteers for charity fundraising
  • a third-party business
  • employees for expenses in petty cash
Source: HM Revenue & Customs Tue, 22 Feb 2022 00:00:00 +0100
5a48f612 f6ac 45ab ab75 9c284965be2f 800x380 - Option to tax (VAT) land and buildings

Option to tax (VAT) land and buildings

There are special VAT rules that allow businesses to standard rate the supply of most non-residential and commercial land and buildings (known as the option to tax). This means that subsequent supplies by the person making the option to tax will be subject to VAT at the standard rate.

The ability to convert the treatment of VAT exempt land and buildings to taxable can have many benefits. The main benefit is that the person making the option to tax will be able to recover VAT on costs (subject to the usual rules) associated with the property including the purchase and refurbishment of the property.

One interesting aspect of the rules concerns what happens if you make changes to a building after you have opted to tax. HMRC’s guidance sets out the following basic principles that apply to the most changes made:

Extensions. If you have opted to tax a building and you extend it at a later date, upwards, downwards or sideways, your option to tax will apply to the whole of the extended building.

Linked buildings. If prior to their completion buildings are linked by an internal access or covered walkway they are treated as a single building and an option to tax will apply to both parts. If a link is created after both buildings are completed, the option to tax will not flow through with the link.

Forming a complex. If you have a group of units that have been treated as separate buildings for the option to tax and you later decide to enclose them so as to form a complex, and which meets the description of what constitutes a building, then the option to tax will not spread to the un-opted units.

Source: HM Revenue & Customs Tue, 15 Feb 2022 00:00:00 +0100
3cb0c635 313e 4fcd a9e2 a6713c5e4933 800x380 - Charging charities at lower rates of VAT

Charging charities at lower rates of VAT

There are special rules, under which a VAT-registered business can sell certain goods and services to charities at the zero or reduced rate of VAT. Before charging VAT at a lower rate, you must be able to show evidence that the charity is eligible. This is usually done by obtaining suitable evidence of the charity’s status and a written declaration or ‘certificate’ confirming they meet the conditions for a particular VAT relief.

Charities are legally required to provide an eligibility certificate when you supply qualifying building or construction services to them at zero VAT. A declaration is not required for other supplies but is recommended to prove the charity is eligible for the relief. Completed declarations should be held for at least 4 years.

The reduced VAT rate applies on the sale of fuel and power in certain circumstances to an eligible charity. The zero VAT rate applies on a wider range of supplies including the aforementioned construction supplies and items including certain medical and veterinary equipment, aids for disabled people, advertising and items for collecting donations, drugs and chemicals and equipment for making ‘talking’ books and newspapers.

Source: HM Revenue & Customs Tue, 01 Feb 2022 00:00:00 +0100
3f5ac22a 5287 4d5e 88a8 ac1ed3dadb8e 800x380 - Tax and customs duties for goods sent from abroad

Tax and customs duties for goods sent from abroad

There are special rules to help ensure that goods sent from abroad are taxed appropriately and to ensure that UK businesses supplying goods in the UK, for example by having to compete with VAT free imports, are not disadvantaged. This includes goods that are new or used and bought online, bought abroad, and shipped to the UK and goods received as gifts.

This means that in order to receive your goods you may have to pay VAT, Customs Duty or Excise Duty if they were sent to:

  • Great Britain (England, Wales and Scotland) from outside the UK
  • Northern Ireland from countries outside the UK and the European Union (EU)

VAT is charged on all goods (except for gifts worth £39 or less) sent from:

  • outside the UK to Great Britain
  • outside the UK and the EU to Northern Ireland

Online marketplaces that are involved in facilitating the sale of goods are usually responsible for collecting and accounting for the VAT. If the VAT has not been collected, then you will have to pay VAT to the delivery company either before the goods are delivered or when you collect them.  If you have to pay VAT to the delivery company, it’s charged on the total package value which includes the value of the goods, postage, packing, insurance and any duty owed.

As a general rule, there is no Customs Duty payable on non-excise goods worth £135 or less. There are various rates payable above this level and on excise goods of any value.

Source: HM Revenue & Customs Tue, 25 Jan 2022 00:00:00 +0100
a4a2b5ca fdae 4049 acf8 98df5336c19c 800x380 - VAT Flat Rate Scheme exclusions

VAT Flat Rate Scheme exclusions

The VAT Flat Rate scheme has been designed to simplify the way a business accounts for VAT and in so doing reduce the administration costs of complying with VAT legislation. Using the Flat Rate scheme, businesses pay VAT as a fixed percentage of their VAT inclusive turnover. The actual percentage used depends on the type of business.

The scheme is open to businesses that expect their annual taxable turnover in the next 12 months to be no more than £150,000, excluding VAT.

However, there are a number of anti-avoidance exclusions highlighted in HMRC’s internal manuals.

The exclusions are as follows:

  • Businesses that are eligible for group treatment, or are registered for VAT as a divisional registration, at the time of application – or have been in the preceding 24 months – are excluded. This is designed to reduce the threat of exploitation by larger companies.
  • Businesses that acquire or intend to acquire capital items that are covered by the capital goods scheme are excluded. Analysis showed that the treatment of FRS businesses as fully taxable presented the potential for abuse by exempt companies and this exclusion is to prevent such avoidance schemes from developing.
  • Businesses that are associated – or have been in the preceding 24 months – are excluded. This is a catch-all provision to prevent avoidance and abuse.

In addition, a limited cost trader test was introduced in April 2017. If a business meets the definition of a limited cost trader, then this would usually mean it may be more beneficial to leave the scheme and account for VAT using traditional VAT accounting.

Source: HM Revenue & Customs Tue, 25 Jan 2022 00:00:00 +0100
eaa7be17 f2d6 4d80 a4c7 6ebdf1100b3b 800x380 - Are you registered for Making Tax Digital for VAT?

Are you registered for Making Tax Digital for VAT?

Making Tax Digital (MTD) for VAT is to be extended to cover businesses with a turnover below the VAT threshold from April 2022. The MTD for VAT regime started in April 2019 when businesses with a turnover above the VAT threshold of £85,000 became mandated to keep their records digitally and provide their VAT return information to HMRC using MTD compatible software.

The extension of MTD from April 2022 will apply to all VAT registered businesses with turnover below the VAT threshold of £85,000. This change was first announced in July 2020 and about a third of businesses mandated to sign-up from April 2022 have already voluntarily chosen to use MTD.

If you are affected and have not yet signed up, we would urge you to start the process as soon as possible.

To sign up to MTD for VAT, businesses, or their agent need to:

  1. Visit GOV.UK and choose Making Tax Digital-compatible software. For many businesses, the software they are using should already be compatible with MTD.
  2. Keep digital records starting from 1 April 2022 or the beginning of their VAT period
  3. Sign up and submit their VAT Return through Making Tax Digital

A small number of VAT-registered businesses may be eligible for an exemption from MTD, if it is not reasonable or practicable for them to use digital tools for their tax. If a business has previously been granted an exemption for VAT online filing, this will carry over to MTD VAT requirements.

Source: HM Revenue & Customs Tue, 11 Jan 2022 00:00:00 +0100
56ec2d50 6d08 4f5a b5a4 0904e476c4a1 800x380 - Postponed VAT accounting

Postponed VAT accounting

Since 1 January 2021, businesses registered for VAT have been able to account for import VAT on their VAT return, often referred to as postponed VAT accounting. For most businesses, this means that they can declare and recover import VAT on the same VAT return. The normal VAT recovery rules regarding any VAT that can be reclaimed apply. 

This applies to all customs declarations that require businesses to account for import VAT, including supplementary declarations, except when HMRC have notified a business otherwise. 

These rules save businesses from having to pay import VAT (at the port of entry) and to recover at a later date. This offers cashflow benefits for affected businesses. HMRC has confirmed that the postponed VAT accounting rules are to remain in place permanently.

Businesses are able to account for import VAT on imports into Great Britain (England, Scotland and Wales) from anywhere outside the UK. Businesses in Northern Ireland can use the postponed VAT accounting for goods imported from outside the UK and EU. The VAT rules for the movement of goods between Northern Ireland and the EU have not changed and remain subject to the Northern Ireland Protocol.

VAT registered businesses do not need any specific approval from HMRC in order to account for import VAT on their VAT return.

Source: HM Revenue & Customs Tue, 14 Dec 2021 00:00:00 +0100