Effective VAT advice to help your organisation remain compliant while minimising tax liability.
VAT, as a form of consumption tax, is a global concern, requiring specialist VAT advice.
In the UK, VAT is a tax that is essentially collected by companies on HMRC’s behalf. However, its application and each business’s VAT duties vary considerably – creating compliance risks.
VAT is chargeable on the supply of most goods and services made in the UK by individuals, companies, partnerships, clubs, associations, or charities – ‘taxable persons’ – in the course of business, when their taxable turnover exceeds the registration thresholds.
Complications arise around the distinction between whether a supply is one of goods or services, as different rules apply to the time and place of supply. Other complexities include the correct application of ‘zero-rate’ and ‘VAT exempt’.
Importantly, VAT becomes a consideration in many wider business transactions, such as the sale of a business.
Internationally, businesses must deal with different administration rules, rates, information requirements, lead times and deadlines.
There is considerable scope for error across the VAT regime.
VAT demands ongoing management to ensure compliance with administration requirements as a result of relevant events, to ensure the correct levels are being collected on behalf of HMRC.
Here to help
As experienced tax consultants, ETC bring extensive expertise providing VAT advice to businesses across the full range of VAT related issues.
Our particular VAT advice expertise is advising both property investors and developers on all aspects of property specific taxes, including instances where VAT arises and application of TOGC and VAT exemption.
We can also provide general assistance with the compliance aspects of VAT duties, calculating liability, and advising on best practice for maintenance of mandatory tax records and filing returns. We also advise on calculating and making tax payments based on forecast and all associated data.
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What is VAT?
Value Added Tax (VAT) is a tax on supplies of goods and services made by a taxable person in the course of a business.
VAT is charged on:
• The supply of goods and services made in the UK.
• The importation of goods to the UK from outside the EU.
• The acquisition in the UK of goods from other EU member states.
Under the UK and the EU VAT system, the application of VAT is determined by the place of supply rules. The general rule is that VAT is charged in the country where the customer belongs, subject to a number of exceptions.
Is it mandatory to register for VAT?
In the UK, it is not obligatory to register for VAT unless supplies made by a taxable person are in excess of £83,000.
If the taxable person has ‘reasonable belief’ that the value of taxable supplies of goods and services will exceed £83,000 over the course of the next 30 days, they should register for VAT.
Each quarter, all businesses that are VAT registered must account for all the VAT they have charged to others, or paid out to suppliers, by submitting a VAT return online.
Failure to file the return on time will result in penalties.
In some instances, voluntary registration may be desirable and possible even though the threshold is not reached but where certain other criteria are met.
Where VAT is incurred before registration, even though the basic rule is that, in order for a person to recover input tax, he must be a taxable person at the time the relevant supplies are received, VAT incurred before registration may be recovered as input tax.
How does VAT apply to property transactions?
VAT does not apply to the majority of commercial property transactions, including leases, licences to occupy any interest in land or buildings and sales of freehold commercial property more than three years old or sales, leases or licences of all residential or charitable property.
There are however a number of exceptions, notably new build properties, or where there has been an election to charge VAT (eg to neutralise the VAT costs of renovations or refurbishments). VAT liability usually lies with the landlord / seller.
Suppliers can elect to charge VAT on commercial property transactions that would otherwise be exempt, subject to a number of restrictions.
The main driver is to recover VAT incurred on goods and services that have been supplied to the business previously – ‘input tax’.
Before the transaction takes place, the supplier must change the transaction from “exempt” to “taxable” and inform HMRC of their intentions in writing within 30 days of this date.
If the supplier has previously made a commercial property transaction that was exempt from tax, they must first obtain permission from HMRC if they wish to elect to charge VAT.
Would VAT apply to the sale of the business, or could this be structured as a transfer of a going concern (TOGC)?
VAT is not usually payable on commercial property transactions involving the Transfer of Going Concern (“TOGC”).
TOGC applies where assets are being sold together in the form of something that is capable of being run as a business, and the buyer intends to use those assets to carry on the same type of business.
Because of the tax benefit of this rule, the eligibility requirements are strict. For example, ensuring the contract specifies the transaction is to be treated as a TOGC, both buyer and seller are VAT registered, both buyer and seller have elected to charge vat, and both buyer and seller use the property for the same business purpose both before and after the transaction.
TOGC will fail where the buyer does not carry on some other, taxable, business, and is therefore not a taxable person.
Where the transaction does not qualify as a TOGC, the transfer will require specialist advice to manage the resulting tax implications.
What are the current applicable VAT rates?
There are currently three VAT rates applicable to the sale of goods and services in the UK:
• Standard rate (20%) – default for all goods and services.
• Reduced rate (5%) – for qualifying goods and services such as children’s car seats.
• Zero rate – as specified in Schedule 8 of VATA 1994, e.g. new houses, books, newspapers and children’s clothes.
Some items are completely exempt from VAT. The majority of exports for example are zero-rated. Zero rating is preferable to exemption as the VAT on costs incurred in making a zero-rated supply can be recovered, unlike for exempt.
What are VAT schemes?
When you become VAT registered, you will by default be assigned to the Standard VAT Accounting scheme. This may not however be the most beneficial option for your business or circumstances taking cash flow, administration requirements and market sector into consideration.
• Standard VAT Accounting scheme: enables you to reclaim VAT at the point an invoice is received from a supplier, and makes you liable for VAT at the point you send an invoice to a customer. You are liable for the VAT even where the customer has not paid after six months.
• Flat Rate scheme: aimed at small businesses (less than £50,000 turnover) to ease the administrative burden of accounting for VAT. Businesses pay a rate as a percentage of turnover rather than calculating VAT on every transaction. Using this scheme you don’t have to calculate the VAT on each and every transaction. The rate payable will be determined by HMRC, depending on your market sector.
• Cash Accounting Scheme: VAT is payable when the customer pays, and can only be reclaimed when purchases have been paid for. To be eligible, your estimated VAT taxable turnover must be less than £1.35m.
• Annual Accounting scheme: you pay the VAT owed throughout the year in nine monthly or three quarterly instalments on the basis of only one annual return. These instalments are based on the VAT you paid in the previous year, or an estimate if you have been trading for less than a year. To be eligible, your estimated VAT taxable turnover must be less than £1.35m. You can make additional payments as and when you wish.
How long do you need to keep VAT records?
You must keep VAT records for at least six years, either in paper form or electronically, but they must be accurate, complete and easy to access.
You must keep a VAT account, separating records of the VAT you charge and the VAT you pay on your purchases.
Photocopies of VAT invoices cannot be used.
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Essential information about VAT.
VAT is a tax on the supply of goods and services made by a taxable person in the course of a running a business. For VAT purposes supplies are divided into both taxable supplies and exempt supplies.
Within the realm of taxable supplies there are actually three categories of supply – standard rated, zero rated and reduced rate. The distinction between the different types of taxable supply and an exempt supply is crucial from a VAT point of view, but is often misunderstood.