Frequently asked Questions about VAT
Q. When do I have to register for VAT?
A. VAT registration is compulsory for any person or entity undertaking business activities which generate an income considered to be taxable (i.e. VAT is applicable at 20, 5 or 0%) and where the registration threshold is exceeded. Currently the registration threshold is £77,000. Where you exceed £77,000 of taxable income in one calendar month you have one month to notify HMRC of this and you will be registered from the first day of the month when you exceeded the threshold. If you do not exceed in any one month there is a rolling 12 month consideration where the cumulative 'taxable' total is considered. Following the calendar month end where your cumulative taxable income exceeds the threshold you have one month to notify HMRC and are registered from the first day of the month following the month’s notification period. NB failure to register at the appropriate time will mean HMRC will take any VAT owed to them as well as calculating a late notification penalty.
Q . What is the correct VAT rate for what I do?
A. The UK VAT system works on the assumption that everything is subject to VAT at the standard rate (of 20%) unless otherwise specified. VAT legislation determines what these exceptions to the general rule are. Zero rated supplies include certain foodstuffs – but not catering, books. Construction services - but not all, protected buildings - very complicated, international services, transport – there are detailed specifications and a number of others. Supplies exempt from VAT include land and buildings – but this is very complicated and requires detailed consideration, education, healthcare and financial services. Reduced rate VAT (currently 5%) includes certain construction services of alteration of specific properties and certain supplies of fuel and power.
Q. I incur VAT on lots of my expenditure, how do I get it back?
A. As a starting point you have to incur the VAT costs in making taxable (i.e. VAT at 0, 5 or 20%) supplies and be VAT registered. Once registered, any VAT incurred in making taxable supplies can by and large be recovered by offsetting the VAT incurred on costs against the VAT due on sales when submitting a VAT return. VAT regulations make specific exceptions to this general rule, i.e. if you purchase a car to use in your business unless it is for use as a taxi, driving instruction or suchlike any VAT incurred cannot be recovered (whereas if you hire the car 50% of the VAT can be recovered), any VAT incurred on business entertainment unless wholly enjoyed by staff of the business cannot be recovered.
Q. I’ve discovered an error in previous submissions, what do I do?
A. Your actions depend upon the size of the mistake identified, post 1 July 2008 any errors totalling less than £10,000 (£2,000 pre 1 July 2008) can be adjusted on the next VAT return, where the £10,000 limit is exceeded the errors need to be manually disclosed to HMRC. Where there is such disclosure HMRC will calculate interest due to them on sums owed to them. Conversely if there are sums owing to your business exceeding the disclosure limits you remain obliged to notify HMRC but they will not pay you interest on the sums due to you. Failure to take any action will result in an interest charge on any sums identified as due to HMRC by HMRC as well as the potential for misdeclaration penalties and should HMRC suspect that you were aware of errors owing money to them they will instigate proceedings to investigate the possibility of evasion – a much more serious occurrence.
Q. I’m about to acquire goods and services from a VAT registered person who is insisting that VAT is charged on them because he is VAT registered – is this correct as any VAT cost to me is irrecoverable?
A. Not necessarily. Many VAT registered businesses assume that what they do must be subject to VAT at 20%. VAT legislation is very specific and does not allow businesses to have any discretion, it is either VATable or it isn’t. If in doubt check it out.
Q. VAT aaaaaaarrrrrgggghhh!
A. Stay calm and contact us via the contact page. We’ve seen just about every VAT eventuality and know that every difficulty can be resolved, usually with a satisfactory outcome. Give us a call and we might be able to give you some helpful pointers at no cost, if it’s more complicated we’ll let you know what your options are.
Q. My business has income from a variety of activities with differing VAT liabilities – is there a simple way of dealing with this?
A. Possibly. In such circumstances we would suggest a review of your activities to understand what VAT is incurred, what is recovered and whether an alternative arrangement such as a flat rate scheme (if the conditions are met) might be appropriate and allow a more beneficial or simpler treatment for your business.
Q. I’ve heard plenty of rumours about the VATman – are they true?
A. In some instances certainly, in the vast majority not. HMRC officers work under complicated legislation and follow strict guidelines on what they can or can’t do, whilst there may be misunderstanding by individual officers of HMRC on how these powers should be applied in 99% of cases there is never any dispute. If there is a dispute HMRC have a framework to resolve matters. Also the popular myth that HMRC officers retain a percentage of the errors they identify is completely without foundation – if it were true no one would ever leave HMRC to set up their own business!