Category: Value Added Tax

Businesses can reclaim VAT on pre-registration expenses if they relate to taxable supplies made after VAT registration. The rules differ for goods and services, with time limits of 4 years for goods and 6 months for services. Proper understanding ensures you don't miss out.

VAT can only be reclaimed if the pre-registration costs relate to taxable goods or services that will be supplied by the business after it becomes VAT registered.

Different rules apply depending on whether the costs are for goods or services:

Goods: VAT can be reclaimed for goods still held by the business or for goods used to produce other goods still in possession of the business.

•  Time limit for reclaiming: 4 years from the date of registration.

  Services: VAT can be reclaimed for services related to the business.

•  Time limit for reclaiming: 6 months from the date of registration.

Pre-registration VAT should be reclaimed on the business’s first VAT return. In certain cases, it may be possible to backdate the VAT registration. This should be considered if there is additional Input Tax that can be recovered.

There are specific provisions for partially exempt businesses, businesses with non-business income, and the purchase of capital items under the Capital Goods Scheme (CGS). These rules may affect the recoverability of VAT and should be reviewed in detail based on the circumstances of the business.

Reclaiming VAT on company cars isn’t as simple as it sounds. Generally, businesses can’t recover VAT unless the car is used exclusively for business purposes. But there are exceptions—like taxis, driving schools, and commercial vehicles. Here’s what you need to know.

There are complex VAT rules that determine how much VAT can be reclaimed when buying a new car. Generally, businesses cannot recover the VAT paid on a car purchase.

An exception occurs when the car is used exclusively for business purposes. This has been clarified through various legal cases, establishing that to qualify for VAT recovery, the car must not be available for personal use. This means that the car should only be accessible to employees during working hours and should never be used for personal trips. Businesses can reclaim VAT on a new car purchased for specific activities, such as for taxis, self-drive hire, or driving instruction.

If a business leases a qualifying car for business purposes, they can normally reclaim 50% of the VAT paid. The 50% block is to cover the private use of the car.

The rules are generally more straight forward for the purchase of commercial vehicles such as a van or lorry. VAT on a lorry, van or other commercial vehicle can be recovered if it is supplied to a registered person and is used for the purpose of their business or trade. HMRC usually ignores any incidental private use of most types of commercial vehicles.

Navigating VAT in the construction industry can feel like untangling scaffolding. Enter the VAT reverse charge—special rules that mean sub-contractors no longer charge VAT on services but contractors handle the tax instead. Here's how it works and who it affects.

There are special VAT reverse charge rules that can apply to certain construction businesses. When these rules apply, the supply of most construction services between construction or building businesses is subject to the domestic reverse charge. The reverse charge only applies to supplies of specified construction services to other businesses in the construction sector.

The charge applies to standard and reduced rate VAT services:

• for businesses who are registered for VAT in the UK; and that are
• reported within the Construction Industry Scheme.

This means that where the rules apply, sub-contractors no longer add VAT to their supplies to most building customers, instead, contractors are obliged to pay the deemed output VAT on behalf of their registered sub-contractor suppliers. However, the deemed output tax is also available as a deduction from VAT paid if it qualifies as input VAT according to the usual rules. In which case there is no cash flow penalty for contractors. 

The VAT domestic reverse charge applies to the following services:

• constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not), including offshore installation services;
• constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours, pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence;
• installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure;
• internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration;
• painting or decorating the inside or the external surfaces of any building or structure; and
• services which form an integral part of or are part of the preparation or completion of the services, including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works.

The VAT Flat Rate Scheme allows businesses to pay VAT as a fixed percentage of their total turnover, which includes VAT. The applicable percentage varies based on the business type. This scheme is designed to simplify VAT accounting, thereby reducing the administrative burden associated with VAT compliance.

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). This annual taxable turnover includes all sales—standard, reduced, zero rate, and other supplies—but excludes the actual VAT charged, VAT-exempt sales, and sales of capital assets.

Since April 2017, a 'limited cost trader' test has been in place. Businesses that meet the conditions as limited cost traders must use a fixed rate of 16.5% under this scheme. For these types of businesses, it is usually beneficial to opt out of the VAT Flat Rate Scheme and use traditional VAT accounting.

Once enrolled, businesses can remain in the scheme as long as their total income does not exceed £230,000 in any 12-month period, with special provisions for temporary increases in turnover. Additionally, there is a 1% discount available for businesses in their first year of VAT registration.

When approaching the VAT registration threshold there are important matters to consider. The VAT registration threshold is the point at which businesses must register for VAT with HMRC.

A business must register for VAT if:

• their total VAT taxable turnover for the previous 12 months is more than £90,000 – known as the ‘VAT threshold’;
• they expect their turnover to go over the £90,000 VAT threshold in the next 30 days; or
• they are an overseas business not based in the UK and supply goods or services to the UK (or expect to in the next 30 days) – regardless of VAT taxable turnover.

With traditional VAT registration, businesses are required to collect VAT on their sales and pay it to HMRC even if customers have not paid their invoices. This can create cash flow issues, as the business must remit the VAT before receiving full payment from customers. This means that small businesses may struggle with cash flow due to VAT liabilities, especially if they do not have enough working capital to cover tax obligations while waiting for customer payments.

We would be happy to help businesses approaching the VAT registration threshold understand their options. There are a number of VAT registration options available. Making the wrong choice could have significant cash flow consequences. It may be possible to alleviate these difficulties by adopting the VAT Cash Accounting Scheme or VAT Flat Rate Scheme but take advice before making a decision as registration criteria apply; not all businesses would qualify.

The VAT treatment of motor expenses is an important concern for any business that incurs VAT on these costs. Below, we highlight key points to consider regarding the recovery of input tax (VAT) when leasing vehicles.

We have covered below some important points to be aware of concerning the recovery of input tax (VAT) when leasing vehicles.

• Leasing company recovering VAT on purchase of cars. A leasing company can usually recover the VAT incurred as long as the cars are leased at a commercial rate.
• Businesses leasing a car and recovering the VAT. If a business leases a ‘qualifying car’ for business purposes they cannot, in most cases, recover 50% of the VAT charged. The 50% block covers the private use of the car. The business can reclaim the remaining 50% of the VAT charged, subject to the normal rules.
• Cars leased primarily for taxi or driving instruction. A business can reclaim all of the VAT charged on the lease if the car is a qualifying car and the business intends to use it primarily for:
  • hire with a driver for carrying passengers; or
  • providing driving instruction.
• 50% block applying to self-drive hire (daily rental) as well as leasing. This restriction applies if the car is hired simply to replace an off the road ordinary company car.

There are special VAT reverse charge rules in place for certain building contractors and sub-contractors. These regulations, which came into effect on 1 March 2021, make the supply of most construction services between construction or building businesses subject to the domestic reverse charge. The reverse charge only applies to supplies of specified construction services provided to other businesses within the construction sector.

If you are VAT registered in the UK and supply services to the building and construction industry, you must use the VAT reverse charge if the following conditions are met:

• Your customer is registered for VAT in the UK.
• Payment for the supply is reported under the Construction Industry Scheme (CIS).
• The services you provide are standard or reduced-rated for VAT.
• You are not an employment business supplying staff or workers, or both.
• Your customer has not provided written confirmation that they are an end user or intermediary supplier.

When these rules apply, sub-contractors do not add VAT to their supplies for most building customers. Instead, contractors are responsible for paying the deemed output VAT on behalf of their registered sub-subcontractor suppliers. And note, contractors can then reclaim the same amount of VAT as input tax on their VAT return, subject to the usual rules. In effect, contractors are paying their subcontractors' VAT to HMRC and then claiming it back on the same VAT return.

It is important for businesses to understand and comply with these rules in order to avoid potential penalties from HMRC.

The taxable turnover threshold for VAT registration is currently £90,000 and has applied since April 2024.

Businesses must register for VAT if they meet one of the following conditions:

1. At the end of any month, the value of taxable supplies made in the past 12 months exceeds £90,000; or
2. At any point, there are reasonable grounds to believe that the value of taxable supplies in the next 30 days will exceed £90,000.

For condition 1, HMRC provides the following illustrative example. On 15 July your total taxable turnover for the last 12 months is £100,000. That’s the first time it has gone over the VAT threshold. You must register by 30 August. Your effective date of registration is 1 September.

For condition 2, HMRC provides the following illustrative example. On 1 May, you arrange a £100,000 contract to provide services. You’ll be paid at the end of May. You must submit your VAT registration application by 30 May. Your effective date of registration will be 1 May.

The £90,000 registration threshold also applies to relevant acquisitions from EU Member States into Northern Ireland.

Additionally, businesses without a physical presence in the UK may still be required to register for VAT if they supply goods or services to the UK or expect to do so in the next 30 days.

There are special VAT rules that allow two or more companies or limited liability partnerships, commonly referred to as ‘bodies corporate’, to be treated as a single taxable person for VAT purposes known as a VAT group.

These bodies corporate can register as a single taxable person or VAT group if:

• each body has its principal or registered office in the UK; and
• they are under common control, for example, one or more company is a subsidiary of a parent company.

The VAT group registration is made in the name of the ‘representative member’, who is responsible for completing and submitting a single VAT return and making VAT payments or receiving VAT refunds on behalf of the group.

This is particularly helpful for those whose accounting is centralised. As a VAT group is treated as a single taxable person, there is usually no requirement to account for VAT on goods or services supplied between group members. Only one VAT return is required for the whole group. However, all members of the VAT group remain jointly and severally liable for any tax debts.

There are other important points to be aware of in respect of a VAT group registration. For example, the representative member must have all the necessary information to submit a VAT return for the group by the due date. The partial exemption de minimis limits apply to the VAT group as a whole and not the members individually.

The VAT penalty regime that applies to the late submission and / or late payments of VAT returns changed for VAT return periods beginning on or after 1 January 2023. Under the new regime, there are separate penalties for late VAT returns and late payment of VAT.

The system is points-based. This means that taxpayers will incur a penalty point for each late VAT submission. At a certain threshold of points, a financial penalty of £200 will be charged and the taxpayer will be notified. The threshold varies depending on the required submission frequency (monthly, quarterly, annual). For quarterly VAT returns, the penalty points threshold will be 4 points. The penalty points will reset to zero following a period of compliance, for quarterly returns this requires 12 months of compliance. There are time limits after which a point cannot be levied. 

There are also late payment penalties. A first payment penalty of 2% of the unpaid tax that remains outstanding 16-30 days after the due date. The second payment penalty increases to 4% of any unpaid tax that is 31 or more days overdue.

Late payment interest will be charged from the date a payment is overdue until the date it is paid in full. Late payment interest is calculated as the Bank of England base rate plus 2.5%.

More details have been published regarding Chancellor Rachel Reeves' plans to impose a VAT charge on private school fees. The government has said that the money raised by ending the tax breaks on VAT, and business rates for private schools, will help secure additional funding for state education programs.

From 1 January 2025, all education services and vocational training supplied by a private school, or a connected person, for a charge will be subject to VAT at the standard rate of 20%. Boarding services provided by a private school, or a connected person, will also be subject to VAT at 20%. In addition, any fees paid from 29 July 2024 pertaining to the term starting in January 2025 onwards will be subject to VAT. Boarding and lodging closely related to such supplies will also be subject to 20% VAT.

The government have also said they will legislate to remove eligibility of private schools in England to business rates charitable rates relief. However, the government accepts that some students with special educational needs may require the specific support available only in private schools. As a result, the government will review how to mitigate the potential effects of these changes for students whose private school placement is outlined in an Education, Health, and Care Plan (EHCP).

Schools that do not currently make any taxable supplies, such as renting out their facilities, will be able to register with HMRC starting from 30 October 2024, the date of the Autumn Budget. Schools that already make taxable supplies can choose to register for VAT before 30 October if they so wish.

School fees that were paid before 29 July 2024 will follow the VAT treatment in force at the time of the normal tax point for these supplies, where the fee rate for the relevant term has been set and was known at the time of payment.

A new digital VAT registration tool has been launched by HMRC that can be used to help businesses work out the effects of registering for VAT.

The launch of the tool known as the VAT Registration Estimator came about following feedback from small businesses suggested an online tool would be helpful to show when their turnover could require businesses to register for VAT and its effect on profits. HMRC has said that there are more than 300,000 new VAT registrations each year.

A business must register for VAT if:

• their total VAT taxable turnover for the previous 12 months is more than £90,000 (£85,000 prior to 1 April 2024) – known as the ‘VAT threshold’;
• they expect their turnover to go over the £90,000 VAT threshold in the next 30 days; or
• they are an overseas business not based in the UK and supply goods or services to the UK (or expect to in the next 30 days) – regardless of VAT taxable turnover.

HMRC’s Director General for Customer Strategy and Tax Design, said:

'We know that the majority of our customers want to get their tax right. We have listened to what businesses have said and the new tool is designed to help them understand VAT registration, including when they might be required to register.

The VAT Registration Estimator has been developed in partnership with small businesses and trade representatives who tested the online tool and gave feedback before its launch.

We hope it will support businesses’ understanding of VAT registration, especially when combined with our guidance and other services.'

The VAT registration tool is free to use, and it should take around 20 minutes to complete on first use. The estimator is accessed through GOV.UK guidance pages, rather than the Government Gateway. HMRC has said they will not record any details that you input.

The VAT Registration Estimator can be found at the foot of this webpage https://www.gov.uk/guidance/check-what-registering-for-vat-may-mean-for-your-business

The VAT Annual Accounting Scheme is available to most businesses with an annual turnover of up to £1.35 million. Key benefits of the scheme include the obligation to file just one VAT return per year, which can greatly reduce administrative time and costs compared to preparing and submitting quarterly VAT returns.

Designed for small businesses, the scheme can be used alongside the VAT Flat Rate Scheme or with standard VAT accounting. It also allows for regular interim payments throughout the year, which can assist businesses in managing their cash flow.

In order to qualify to join the scheme, the business must be up to date with VAT payments, solvent and new to the scheme. In addition, the business cannot be a division of a company or a part of a group of companies.

Under the scheme, businesses make interim VAT payments based on their last years VAT figures or on an estimated total annual liability for newly VAT registered businesses. These interim payments are followed by a final balancing payment submitted with the annual VAT return, which can be prepared at the same time as the annual accounts.

The final payment for the annual return is due within two months after the end of the 12-month VAT accounting period.

Businesses that are in the scheme can continue using it until their taxable supplies exceed £1.6m or they no longer meet the eligibility criteria.

The VAT Import One Stop Shop (IOSS) Scheme applies to goods imported in consignments with a value of £135 or less (known as low value goods) from countries outside the EU and Northern Ireland, to consumers in the EU, Northern Ireland, or both.

The IOSS Scheme can be used to report and pay VAT due on imports of low value goods to consumers (B2C sales) in the EU, Northern Ireland, or both.

To use the scheme your goods must:

• be located in a country outside the EU and Northern Ireland at the point of sale;
• have a consignment value of £135 or less; and
• be sold to a consumer in the EU or Northern Ireland.

If you only sell through an online marketplace, they should have already registered in their name for the IOSS. This means that the online marketplace is responsible for reporting and paying any VAT due.

The IOSS scheme is available to:

• businesses in Northern Ireland; and
• businesses in countries that the EU has concluded and recognises an agreement with, on the mutual assistance for the recovery of VAT — currently only Norway.

You must follow the normal VAT rules if you sell goods imported in consignments with a value of more than £135.

The taxable turnover threshold that determines whether businesses should be registered for VAT is currently £90,000. Businesses with turnover below this level can also apply for a voluntary VAT registration.

Businesses charge VAT on their sales. This is known as output VAT and the sales are referred to as outputs. Similarly, VAT will be payable on most goods and services purchased by the business. This is known as input VAT.

The output VAT is being collected from the customer by the business on behalf of HMRC and must be regularly paid over to them. However, the input VAT suffered on most (but not all) goods and services purchased for the business can be deducted from the amount of output tax owed to HMRC.

If your input tax is greater than your output tax, HMRC will owe you a refund. 

As a VAT-registered business you must:

• include VAT in the price of all goods and services at the correct rate;
• keep records of how much VAT you pay for things you buy for your business;
• account for VAT on any goods you import into the UK;
• report the amount of VAT you charged your customers and the amount of VAT you paid to other businesses by sending a VAT return to HM Revenue and Customs (HMRC) – usually every 3 months; and
• pay any VAT you owe to HMRC.