17 and a half things you need to know about VAT – Part 3
This is the third and final part of this short series. I’d love to have your comments on any of these points.
14. Correcting mistakes
Made a mistake? Better put it right. You can only correct errors going back four years. If your error is larger than the limit allowed for doing it on your VAT return, you will have to tell HMRC in a letter. Even if you correct an error by making the adjustment on your next VAT return it might be worth telling HMRC that you’ve done this to prevent them at a later date deciding that a penalty is due.
15. Motor car
Buying a business car? Going to claim back the VAT? Stop! If you do claim back the VAT on a car you are buying, you are likely to get some grief from HMRC. This is because, unless you are a taxi firm, or a motor dealer, you are unable to recover the VAT. You might want to consider leasing the car, avoid an agreement that results in you buying the car, as you will get 50% of the VAT on the leasing cost back.
16. Mileage claims and VAT
There are two ways to deal with claiming back VAT on the fuel you use for business. One is to claim for the mileage you cover at a fixed rate, and claim VAT based on the fuel element of that rate. Details of the currently accepted fuel element can be found on HMRC’s website. That amount is VAT inclusive so you have to work out how much VAT is in it, e.g. If the rate is 16p per mile the VAT in that, at the time of writing, is 16×7/47 = 2.4. For simplicity you could work out the VAT by multiplying this figure by the number of miles claimed.
The other thing you have to do is to remember to get a VAT receipt from the garage for the fuel. You will need enough receipts so that the VAT on them is at least that being claimed.
This method is most often used when the car is a private car, although is sometimes used for cars owned by the business.
17. Fuel scale charge
This is the alternative to the above method, and is most often used when the car is owned by the business. With this method the business recovers VAT on all the fuel purchased and makes an adjustment for private usage by adding an amount to its sales VAT. The amount to add is set out in tables published by HMRC. I have put most of them into an earlier post on Fuel Scale Charge.
17.5 It depends
That’s always the answer to a question about VAT!
Got a question? Need a bit more information? Leave a comment below and I’ll reply.
17 and a half things you need to know about VAT – Part 2
This is the second part of the series. Part 3 will appear in a day or two
7. Get VAT invoices for purchases
One thing that you need to make a habit is asking for VAT invoices when you buy something for your business. Start doing it even if you have yet to register for VAT. The papers are useful for more than just recovering the VAT (when you are VAT registered), they also help your accountant when it comes to doing your accounts and tax return.
8. Entertaining
Do you entertain clients? Or potential clients? Bad news: you are unable to recover the VAT on such expenses.
Staff entertaining, however, is a different story: you can claim back the VAT on the cost of the staff Christmas party (if you can afford to do one).
9. Getting back VAT on overseas expenses
Travel abroad for business? You might be able to get back the VAT on the expenses you have whilst abroad. This particularly applies for travel within the European Union. You can find out more in VAT Notice: 723 or by asking your VAT adviser.
10. Keeping track of invoices
Keeping your books up to date is very boring, but so so important. If you find this important task boring, find your local bookkeeper and ask them to do this task for you.
HMRC now have the power to inspect your records even in the middle of the return period. You need to keep your records up to date to avoid any difficulties when HMRC visit you.
11. Paying less VAT by using the right accounting scheme
There are several ways of accounting for VAT that can save you money. You might want to consider using one or more of the following:
- Cash Accounting;
- Annual Accounting; or
- Flat Rate Scheme.
Taking advice from your VAT adviser on which is the best for you to use is recommended.
12. Exempt versus zero-rated
Do you know the difference between exempt from VAT income and zero-rated income? They both have no VAT added to the price, you say? Is that all?
The big difference is that, put simply, which means it’ll take hours to explain properly, you are unable to recover the VAT on expenses that relate to exempt income that you earn.
Exempt income might be rent you charge for property lettings, or commission received from insurance companies.
13. Partial exemption
This is why you need to know the difference between exempt and zero-rated. If you have income that is exempt from VAT, and income that is VATable, you will be partly exempt. This means that you have to carry out certain checks to determine whether you can recover all your input tax. This topic is too complex to cover in this post. If this is something that might impact upon your business you should ask your VAT adviser for help.
Got a question? Need a bit more information? Leave a comment below and I’ll reply.
Yes, really. These are things that I think are really worth knowing. All 17.5 of them:
1. Registration limits
Do you know the current VAT registration limit? The point at which you have to register for VAT. You can find full details in this post on the registration limits for 2010 and earlier years.
Remember that you can register for VAT before you reach the registration limit. It might be worth it.
2. When to tell HMRC that you have gone over the registration limit.
You have to tell HMRC within 30 days of the end of the month you went over the registration limit. So, if your turnover in the 12 months to 30 September is over the registration limit you have to fill in the forms and send them to HMRC by 30 October.
You will be registered from 1 November.
3. VAT treatment of what you sell
Do you know what rate of VAT to charge on what you sell? Are you sure? Really, really sure?
There are situations where what you are selling has a different VAT treatment because, for example, you sell it to someone outside the UK, and the VAT treatment might differ depending on whether the customer is a consumer or a business.
Get it wrong and you may find yourself having to pay VAT to HMRC that you haven’t collected. Or you may lose a good customer, which is probably worse!
4. Imported services
What’s so important about imported services? They’re very economic because there is no VAT on them. Or is there?
If you are VAT registered and you import a service from a supplier outside the UK, you need to account for VAT on it as though you sold it. You add this to the VAT on your sales for the VAT period. If you can recover all your input tax you can also add the same amount to the you are claiming VAT on your expenses.
5. VAT Return – file on time
If you regularly put your VAT return in late, you are going to be penalised. That’s money out of your profit margin – wasted.
Finding it difficult to make time to do your VAT return? It will probably be cheaper to get a local bookkeeper to do it for you, especially if it helps to reduce your accountants bill too. It will also be weight of your mind knowing someone else is doing it.
6. Pay VAT on time
For much the same reason as getting your VAT return in on time – paying penalties are a waste of money. Not to mention that businesses that regularly pay late are likely to attract the attention of HMRC, with the resultant hassle of dealing with an inspection.
These two points are good reasons to look at doing your VAT return online, and paying by direct debit. See my most recent post on this.
This is the first part of a three part series, part two will appear in a day or two.
Got a question? Need a bit more information? Leave a comment below and I’ll reply.
Well…
It’s more complicated than that. You have to use the HMRC website and use the form on that page to send them an e-mail.
The form that you have to complete is, err …, comprehensive and will take a few minutes to complete. In addition, it can only be used for telling HMRC about changes to personal data. If you are a business and want to tell HMRC about changes for the business you need to take alternative action.
If you are registered to use Self-Assessment Online you can log on to HMRC’s website and update your details there.
Changes to your business details
Unfortunately you have to use an alternative method to the e-mail system described above. It is no more complicated but means that if you are sole trader you have to remember that you may have to use the two different systems. This being a website for help with VAT issues I’ll confine my comments to that, but if you are looking for guidance on how to tell HMRC about changes relating to other taxes visit this page on HMRC’s website.
For VAT if you are registered for VAT Online services you can go to the log in page on HMRC’s website and update your information there.
Can you reclaim the VAT on a new car?
I was ‘talking’ via a social networking website with a friend recently and the conversation turned to business. May friend asked, “Might I trouble you with a swift VAT query?” and continued “I’m about to buy a car through the company, to use up some excess cash and reduce my Corporation Tax bill, and I was vaguely wondering if there were any wrinkles that would allow me to claim some or all of the VAT back? I can designate it 100% business use and keep full mileage logs if that will help. Any ideas?”
Here’s my response:
“The only way to get any VAT back is, unless you operate a car dealership or a taxi company, to designate it wholly business and have it insured wholly for business – no social domestic or pleasure use. It would also help if it was kept at business premises that are not also your home.
“Really the best way to save VAT on a company car is to lease it – avoiding any suggestion that you might be buying it at the end of the lease. This way you’ll get back 50% of the VAT on the lease payments.
“If you have to buy it outright to eat up all that profit you have, the best you can do is to make sure that all the expenses for it go through the company and you recover the VAT on them.
“Fuel is another issue and it is worth looking at whether the application of a Fuel Scale charge might be beneficial. You claim back the VAT on all your motoring, and pay a fixed amount to HMRC on each VAT return to ‘repay’ the VAT on private motoring. If you do a lot of private motoring, and not much business motoring this could be beneficial.
“These ideas fall flat on their face if you use the Flat Rate Scheme.
“If you have any more questions, just ask!”
And he did!
“A very comprehensive response, thank you.
“OK, one last question, if I may – if I were to claim the VAT back, and a subsequent inspection reversed that, would those nice men with the rubber gloves just ask for the VAT money, or are there additional penalties levied on top?”
This is an important point to which I replied:
“If you claimed back the VAT by mistake and HMRC discover that over claim you will have to pay interest on the amount repaid and might face a penalty of up to 100% of the VAT involved.
My advice is to get it right – even if it hurts a bit – that will be less painful than a penalty later.”
He replied: “OK, sound advice, thanks – given the rather obvious chance of it going against me, I wasn’t planning on claiming anything back if there was even a small penalty. 100% of the VAT involved isn’t small 
Perhaps I’ll just have to buy a company bike as well, then.…”
Now there’s a topic for another post.
