Business owners often struggle to make their way through the labyrinth that is the UK VAT rules. David Marples, Federation of Small Businesses, highlights the key issues and de-mystifies small business’ relationship with VAT.
Registration for VAT
It should be noted that it is the person, not the business that is required to register for VAT. In this context “person” means legal entity; i.e. normally a sole proprietor, partnership, LLP or limited company. A single legal entity can have more than one business, but only one VAT registration that will cover all those businesses.
Whether or not you become liable to register for VAT will be determined in one of two ways; the “backward look” or the “forward look”.
A “person” must notify HMRC if the following are exceeded:
- The “Backward Look”: taxable turnover exceeds £82,000 in any rolling 12 month period. It is NOT based on the financial year-end, the calendar year or the Tax Year. You must notify within 30 days of the end of the month if you exceed the limit.
- The “Forward Look”: taxable turnover will exceed £82,000 in the next 30 days alone. You must register immediately.
Deregistration from VAT
If you cease in business, you must tell HMRC and de-register immediately.
You can, however, also request cancellation of your registration if your taxable supplies in the next 12 months will be £2,000 less than the current VAT registration limit, or if the tax exclusive turnover of your business in the last 12 months has been below the current VAT deregistration limit of £79,000. HMRC will want to see evidence to support the deregistration.
You must maintain records in respect of all sales and purchases made by the business to enable an accurate VAT declaration to be made. It is with noting that the extent of the records will vary from business to business
Occasionally HMRC will make an appointment to inspect your books and records. HMRC cannot search your premises, but they have a right to inspect them. This is an important distinction and means use of their eyes only, not a physical search.
You must keep records for six years, including all till rolls, orders, appointment books, etc.
Cars and Fuel
Reclaiming input tax
You cannot reclaim input tax on the purchase of a car unless it is used exclusively for the business. If the car is made available for any private use, however little, then no VAT is deductible. HMRC state that any car which is insured for social and domestic use is made available for private use.
HMRC will allow recovery of VAT on pool cars, if they are stored at the business premises and not allocated to an individual.
You can recover 50% of the hire or lease charge, where there is private use of the vehicle. If a separate maintenance or repair charge is made, then VAT is recoverable in full on that particular amount. You can identify hire or lease payments by the issue of monthly invoices plus VAT.
If the vehicle can be shown to be used exclusively for business use, and not even made available for any private use, all the VAT charged is recoverable.
VAT on fuel
Where cars are concerned, you have three options:
- Reclaim VAT on all the fuel purchased, whether for business or private journeys. A fuel scale charge is then paid to Revenue & Customs.
- Do not reclaim input tax on road fuel whatsoever (for any vehicles). A scale charge is not then payable for the car(s). You can still recover VAT on all repairs/servicing.
- Keep an accurate record of business and/or private miles, and only reclaim input tax relating to business journeys i.e. if 75% of the mileage incurred relates to business journeys, only reclaim 75% of the input tax. A fuel scale charge is not then payable.
Flat Rate Scheme
If your turnover is less than £150,000 (excluding VAT) per annum and you incur very little input tax, you may wish to consider the benefits of the Flat Rate Scheme. As a note of warning, this scheme may not be suitable if you have zero-rated or exempt supplies; or if you import from the E.U.
As will all tax issues, the important thing to remember is that there are always people available and willing to answer any questions that you have. Whether it be speaking directly to HMRC or using the FSB advice service, it’s important that you understand the framework within which your business must operate as failure to comply by the law can mean unwelcome penalties for you and your business.