10 Top VAT considerations for your business

The supposed ‘simple tax’ VAT impacts on many businesses, both big and small across the country and there are many considerations that should be made in relation to it.  In this article, I will set out ten of the key areas and issues that arise on a weekly basis for our clients at Armstrong Watson.

1. Should my business be VAT registered?

This may sound like one of the simplest questions surrounding VAT, however, it is an area that still causes a degree of confusion for businesses.  The current registration threshold is £85,000 and this should be reviewed on a rolling 12-month basis, not just based on the turnover figure included in your annual accounts.

It is also important to consider what should be included when monitoring the £85,000 threshold.  For example all taxable income, including zero rated income is included, but income deemed to be exempt or outside the scope of VAT is excluded.  If you purchase services from outside the UK, then this may be accounted for under the reverse charge rules, with the value of these transactions also counting towards your VAT turnover, despite actually being an expense to your business.

2. If I do VAT register, would the Flat Rate Scheme be beneficial for my business?

The flat rate scheme is intended to act as a simplification for small businesses.  Instead of calculating output VAT payable on income and the input VAT recoverable on expenditure, a flat rate of VAT payable is calculated on the total turnover achieved. 

This can be especially beneficial for businesses which do not incur a high amount of expenditure with input VAT charged on it.

HMRC have restricted the benefits of the flat rate scheme, particularly for service based businesses with the introduction of the limited cost trader rules on 1 April 2017.  Any businesses currently using the flat rate scheme, should review their position to check that it is still beneficial to them.

Entry to the flat rate scheme is available for businesses with an expected annual turnover of less than £150,000.  Once in the scheme, you will only be required to leave the scheme when annual gross turnover exceeds £230,000.

3. Could Cash Accounting be beneficial to my business?

Cash accounting is available for any business with an expected annual turnover below £1.35million.  Under cash accounting rules, you only pay output VAT to HMRC once you have received payment from your customers, therefore mitigating any cash flow disadvantage created by slow payers.

Correspondingly, you can only recover input VAT once payment has been made to your suppliers, so cash accounting isn’t suitable for everyone, but is certainly worth some consideration if cash flow problems are being experienced.

When using the cash accounting scheme it is important to review your turnover on a quarterly basis as once this exceeds £1.6million for a 12 month period, you will need to revert to invoice based accounting, with potential cash flow issues arising from this change.

4. Is my business partially exempt?

Partial exemption is an area that can strike fear into businesses (and in some cases VAT advisors too).  It is a complicated area of the VAT legislation and if your business does make a mixture of taxable and exempt supplies then it is vital to have your input VAT recovery reviewed on a regular basis.

Some of the more common exempt supplies we see in our client’s businesses are in relation to services involving property, education, health and welfare, finance and insurance. 

Partial exemption is also a key issue affecting the charities we represent, with an added complication here being non-business income, such as grants that also need to be taken into consideration when determining how much input VAT can be recovered.

5. Do I need to consider VAT in relation to my property?

YES! The answer to this question will always be yes.

In every property transaction, be it buying, selling, leasing, constructing, converting, extending or demolishing, VAT should be considered. 

The considerations vary between residential and commercial properties.  There are too many different areas to discuss here but there are always considerations that need to be made.

It is vital that VAT is reviewed early on in any potential property transaction, so that any potential planning can be put in place, or any nasty surprises can be avoided.

6. Is my property a capital goods scheme item?

The capital goods scheme applies to properties where taxable expenditure of over £250,000 has been incurred on your property.  This could have been incurred by various means, such as purchase, construction or extension.

When the capital goods scheme applies, your VAT recovery needs to be considered over a 10 year period and should be reviewed annually.  Similarly to partial exemption, the VAT recovery is based on the taxable usage of the property, compared with exempt or non-business usage. 

If these percentages change year on year, then annual adjustments will be required.

A common occurrence of where the capital goods scheme can become an issue is where a business incurs expenditure on a property for use in their taxable business, but then at a later date rents the property out to a tenant.  If the capital goods scheme is not considered in this scenario, significant amounts of input VAT may be owed back to HMRC.

The capital goods scheme also applies to expenditure over £50,000 on computers, aircraft, ships and boats.

7. How do I account for VAT on the sale or purchase of a business?

The key issue that needs to be considered here is whether the transaction will meet the conditions to be treated as a Transfer of a Going Concern (“TOGC”).

Where a TOGC applies the transaction will be outside the scope of VAT – this is a mandatory treatment when the conditions are met and it will always be necessary to have this reviewed by your advisors.

When property is involved in the transaction (as always with property), there are further VAT issues that should be considered.

8. I have made an error on my VAT returns, what should I do?

My first piece of advice here would be to make sure that you have actually made an error.  Certain areas can be complicated, and even if HMRC say you have done something wrong, don’t always assume that they are correct.  Have your position reviewed by a VAT advisor.

Assuming that there is an error and HMRC are not yet aware of this, ultimately my advice here would be to quantify the error and disclose this to HMRC.

If the error is below £10,000 then it can be corrected on your next VAT return, although it is always advisable to inform HMRC of the issue.

If the error has resulted in you owing HMRC, then penalties can become an issue and the reasons for the error may be important in mitigating any penalty due.  Penalties can be reduced by both being forthright and disclosing the errors to HMRC (rather than HMRC discovering the issue themselves later) and by providing assistance with getting the issue resolved.

9. How does VAT impact on my transactions with overseas customers or suppliers?

Similarly to property transactions, if you are buying or selling goods or services from overseas, then your VAT position needs to be reviewed to ensure compliance.

Issues that need to be considered can include whether or not VAT should be charged to your customers, how to account for VAT on purchases from overseas, whether EC Sales Lists or Intrastat declarations need to be made and whether there is any requirement to be VAT registered in another country.  This list is far from exhaustive and the potential issues can vary depending on whether you are transacting with business or non-business customers, or with EU or non-EU customers or suppliers.

10. How will Brexit affect my VAT position?

The impact that Brexit will have is currently one of the key questions for the whole of the United Kingdom.  From a VAT perspective, there will almost certainly be some changes to how transactions with the EU are treated.

The potential changes are discussed in more detail in my earlier article which can be found by clicking here.

If you currently transact with the EU or believe that Brexit may impact your business, then it would be beneficial for us to have a discussion on how the UK’s impending departure could affect your VAT position.  This will be an ever-evolving position as we head towards the expected departure date in March 2019, and regular discussions on the subject will be useful to ensure that you can stay up to date and prepared for any changes.

If you believe that your business needs to consider any of these areas in more detail, I would be delighted to discuss these further with you to see if I can assist.

CONTACT DAVID

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