VAT – partly exempt businesses

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.

Businesses that make both taxable and exempt supplies must keep a separate record of exempt supplies along with details of how much VAT has been reclaimed.

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.

The tests are met where the total value of exempt input tax:

  1. Is under £625 a month (£1,875 a quarter/£7,500 a year); and
  2. Is less than half of the total input tax incurred.

If both tests are met the VAT can be recovered. Businesses that are partially exempt, need to complete this calculation on a quarterly and annual basis.

Check a UK VAT number

The ability to check a UK VAT number is available at: www.gov.uk/check-uk-vat-number.

This service allows users to check:

  • if a UK VAT registration number is valid; and
  • the name and address of the business the number is registered to.

The service also allows UK taxpayers to obtain a certificate to prove that they checked that a VAT registration number was valid at a given time and date. The certificate will provide valuable evidence for a taxpayer to prove that they acted in good faith should HMRC challenge input tax recovery or seek payment of lost VAT.

The European Commission website also includes an on-line service which allows taxpayers to check if a quoted VAT number from anywhere in the EU is valid. The on-line service is available at: https://ec.europa.eu/taxation_customs/vies/#/vat-validation

New VAT Registration process for agents

A new VAT registration process known as the VAT Registration Service or VRS was made available to agents from 1 August 2022. The VRS had been in testing mode for the previous 18 months and was used by over 37,000 businesses to successfully register for VAT.

One of the key changes with using the VRS is that every new VAT registered business is automatically signed up to Making Tax Digital (MTD) as part of registration, removing the need for that extra step.

To access the VRS service, agents should use the link available at How to register your client for a tax service as an agent. Agents must ensure they use their agent services account credentials in order to login. 

The person completing the application will be asked for their name, phone number and email address. HMRC has clarified that the details are requested solely for the purposes of any follow up questions on the VAT application.

HMRC has also sent an update newsletter to stakeholders on the new VRS. The update answers some FAQ’s including:

What information do I need from my clients to register their business using the VRS?

To complete a VAT registration, you’ll need your client’s:

  • name
  • date of birth
  • National Insurance number
  • ID, such as their passport or driving licence
  • details of turnover and nature of business
  • bank account details (or a reason if no bank account details are provided)
  • Unique Tax Reference (UTR) number

If you’re registering a limited company client, they must have a have a Company Registration Number and a Corporation Tax Unique Taxpayer Reference (UTR) to complete the VAT registration process. Individuals and Partnerships do not need to have a Self-Assessment UTR to register for VAT, but if they do have one, they must supply it.

We recommend you have this information to hand when starting an application. If you are waiting for information from your client, you can save and edit the application for 7 days by clicking ‘Save and Exit’. This will soon be increased to 28 days.

VAT Flat Rate scheme

Using the VAT 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 has been designed to simplify the way a business accounts for VAT and in so doing reduce the administration costs of complying with the VAT legislation.

Using the Flat Rate scheme, you pay VAT as a fixed percentage of your VAT inclusive turnover. The actual percentage you use depends on your type of business. The amount of VAT you pay on your business expenses becomes irrelevant to your VAT returns. This is very different to the normal VAT accounting procedure where the VAT you pay to HMRC is the difference between the VAT you charge your customers and the VAT you pay on your purchases.

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. The annual taxable turnover limit is the total of everything that a business sells during the year. It includes standard, reduced rate or zero rate sales and other supplies. It excludes the actual VAT charged, VAT exempt sales and sales of any capital assets.

A limited cost trader test was introduced in April 2017. Businesses that meet the definition of a 'limited cost trader' are required to use a fixed rate of 16.5% for the scheme. Businesses defined as limited cost traders may find it more beneficial to leave the scheme and account for VAT using traditional VAT accounting.

Once you join the scheme you can continue using the scheme provided your total business income does not exceed £230,000 in a 12 month period. There are some special rules if the increased turnover is temporary. There is also a first year discount for businesses in their first year of VAT registration of 1%.

Final warning to use MTD for VAT

The Making Tax Digital (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.

In April 2022, MTD for VAT was extended to all VAT registered businesses with turnover below the VAT threshold of £85,000. Many businesses with turnover below the VAT threshold had already voluntarily chosen to use MTD for VAT.

More than 1.8 million businesses are using MTD for VAT and more than 19 million returns have been successfully submitted through MTD-compatible software since MTD for VAT was launched.

However, there remains many businesses that continue to use their existing Value Added Tax (VAT) online account to submit VAT returns. The option to submit VAT returns in this way will be closed on 1 November 2022.

This means that businesses who file their VAT returns on a quarterly and monthly basis will no longer be able to use the service from 1 November 2022. There are very limited exemptions available for businesses where HMRC has agreed they are exempt from MTD, for example, people who object to using computers on religious grounds.

HMRC lists the following steps that businesses who are not using MTD for VAT should action as a matter of urgency:

  1. Choose MTD-compatible software – a list of software, including free and low-cost options, can be found on GOV.UK.
  2. Check the permissions in the software – once a business has allowed it to work with MTD, they can file VAT returns easily. Go to GOV.UK to learn how to do this and search ‘manage permissions for tax software’.
  3. Keep digital records for current and future VAT returns – a business can find out what records need to be kept on GOV.UK.
  4. Sign up for MTD and file future VAT returns using MTD-compatible software – to find out how to do this, go to GOV.UK and search ‘record VAT’.

We would of course be happy to help you meet the necessary requirements. If you need any assistance, please do not hesitate to be in touch.

How the VAT Reverse Charge works

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.

UK businesses receiving certain specified goods and services are liable to account for UK VAT, by way of the domestic reverse charge procedure. 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 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

The following example is included in HMRC’s internal manual to help outline how the charge works:

A VAT registered UK distributor of mobile phones sells a number of mobile phones to a VAT registered UK retailer for a VAT-exclusive value of £6,000, an amount that is above the de minimis limit. The distributor does not charge VAT on the supply (£1,200), specifying on its invoice that the reverse charge applies.

The retailer will account for the distributor’s output tax (£1,200) but will also reclaim the amount as input tax, thus producing a nil net effect. The retailer now sells the mobile phones to members of the general public, charging VAT on the supply as normal.

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

Statutory interest

Taxpayers that are owed VAT repayments by HMRC are entitled to claim statutory interest under certain circumstances. Where this is the case, a claim should be made in writing to HMRC. VATA s78 (11) requires all claims for statutory interest to be made within four years of the end of the applicable period to which it relates. 

For example, if a repayment claim is authorised for payment on 31 March 2022. The taxpayer will have until 31 March 2026 to make a claim for statutory interest.

The payment of statutory interest is intended to provide commercial restitution (compensation to the party deprived of the use of the money it is owed) where a taxpayer has overpaid or under claimed VAT as a result of an official error by HMRC.

HMRC’s view is clear that there is no obligation for statutory interest to be paid where an overpayment results from an error by the taxpayer or their accounting systems. 

Transfer of business as a going concern

The transfer of a business as a going concern (TOGC) rules concern the VAT liability on the sale of a business. Normally the sale of the assets of a VAT registered or VAT registerable business will be subject to VAT at the appropriate rate.

Where the sale of a business includes assets and meets certain conditions the sale will be categorised as a TOGC. A TOGC is defined as 'neither a supply of goods nor a supply of services' and is therefore outside the scope of VAT. Under the TOGC rules no VAT would be chargeable on a qualifying sale.

All the following conditions are necessary for the TOGC rules to apply:

  • The assets must be sold as part of a 'business' as a 'going concern'. In essence, the business must be operating as such and not just an 'inert aggregation of assets'.
  • The purchaser intends to use the assets to carry on the same kind of business as the seller.
  • Where the seller is a taxable person, the purchaser must be a taxable person already or become one as the result of the transfer.
  • Where only part of a business is sold it must be capable of separate operation.
  • There must not be a series of immediately consecutive transfers.
  • There are further conditions in relation to transactions involving land.

The TOGC rules can be complex, and both the vendor and purchaser of a business must ensure that the rules are properly followed. The TOGC rules are also mandatory which means that it is imperative to establish from the outset whether a sale is or is not a TOGC. For example, if VAT is charged in error, the buyer has no legal right to recover it from HMRC and would have to seek to recover this 'VAT' from the seller.

VAT Capital Goods Scheme

The VAT Capital Goods Scheme (CGS) is a means of adjusting the initial VAT recovery in respect of certain assets over either 5 or 10 years. The scheme seeks to agree a fair and reasonable attribution of VAT to taxable supplies and non-taxable supplies relating to the use of an asset over its lifetime.

The adjustment period for land and buildings is 10 years and for other CGS assets, 5 years. This adjustment period also considers any non-business use of the asset. The CGS is intended primarily for partly exempt businesses. However, businesses can change direction over the adjustment period and be subject to making CGS adjustments some years after an asset was purchased.

The CGS currently applies to:

  • Land and building (including extensions, alterations and refurbishments) with a cost (net of VAT) of £250k or more.
  • Computers, or computer equipment, with a cost (net of VAT) or £50k or more.
  • Ships and boats with a cost (net of VAT) of £50k or more.
  • Aircraft with a cost (net of VAT) of £50k or more.

The scheme does not apply if:

  • the assets are acquired solely for resale;
  • you spend money on assets which are solely for resale; and
  • assets are acquired, or you spend money on assets, which are wholly used for non-business purposes.

Overseas seller VAT check

Since 2018, online marketplaces (such as eBay or Amazon) have been required to help tackle online VAT fraud. These measures, known as joint and several liability (JSL) for marketplaces aim to ensure that all businesses selling goods in the UK follow the same rules and pay the correct amount of VAT.

Legislation allows HMRC to hold the operator of an online marketplace jointly and severally liable for unpaid VAT where:

  • An overseas seller operating on the marketplace should have registered for UK VAT and has failed to do so.
  • The online marketplace knew or should have known that an overseas seller should be UK VAT registered.
  • HMRC tells them that a seller operating in their marketplace is not meeting its VAT obligations.

HMRC’s guidance states that if you believe an overseas seller should be paying UK VAT, you should check:

  • that they have a valid VAT Registration Number (VRN);
  • the location of the seller;
  • the location of the goods that will be sold by the seller;
  • if the seller, or those directing the seller, have been removed from your online marketplace before;
  • how quickly the seller is able to fulfil orders from UK customers;
  • how the seller fulfils orders from UK customers; and
  • if there’s any information that the seller, HMRC or a third party gives you that might indicate dishonest conduct or failure to meet their VAT obligations.