Category Archives: Value Added Tax

Claiming VAT on pre-registration purchases

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.

Source:HM Revenue & Customs | 20-01-2025

When can you recover VAT on a car purchase

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.

Source:HM Revenue & Customs | 16-12-2024

VAT Reverse Charge in Construction: What You Need to Know

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.
Source:HM Revenue & Customs | 16-12-2024

VAT Flat Rate Scheme overview

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.

Source:HM Revenue & Customs | 02-12-2024

Approaching the VAT registration threshold

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.

Source:HM Revenue & Customs | 25-11-2024