SHOULD YOU PAY VAT?

SHOULD YOU PAY VAT? Glen Hickerton Aston Hughes & Co. Chartered Accountants

Whilst all due care and attention has been taken in the preparation of these notes, no liability can be accepted for any omission or item contained therein. • VAT is an enormous subject. It affects every kind of business. • No one person can be familiar with every aspect! • VAT is always changing. • On average, VAT law changes twice per month. (49 times in one year!). • Always check the law. • Carefully check the facts of your case. • If in doubt and the sum is a large one, take specialist advice. • PLEASE DON’T SHOOT THE MESSENGER!!! Warning! Aston Hughes & Co. Chartered Accountants

VAT originated in the EU. • It is considered to be relatively cheap and easy to administer. • VAT is supposed to simplify trade and reduce distortions between businesses • in the different member states. • Rates of VAT are supposed to be converging throughout the EU, • (but this is a very slow process). • UK and Ireland have far more zero rated items than any other member state. • VAT is charged by the supplier (Output tax for the supplier) • and recovered by the customer at each stage of the commercial chain (input tax • for the customer) • until the final customer is reached (usually a private individual, or possibly a company • or business which cannot recover VAT). • Note that not all input tax is recoverable, the main example being VAT paid on the purchase of a car – except in very restricted circumstances. Back Ground to VAT Aston Hughes & Co. Chartered Accountants

Types of supply • There are six different types of supply: • Current Rate • Non Business Activity • Outside the scope • Exempt • Zero rate 0% (but still taxable supplies) • Reduced rate 5% • Standard rate: 20% Aston Hughes & Co. Chartered Accountants

Non Business Activity • For most businesses, it is unusual for it to receive monies for a non business activity, • (Except say as private individuals) however the following would do so: • 1.Local authority - business rates – which are really a local tax. • 2.Employees receive wages • 3.Charities, when they carry out their charitable activities and for e.g. receive donations. • (If charges are made, these could be subject to VAT). Aston Hughes & Co. Chartered Accountants

1.Sales (mostly of services) for which the place of supply is treated • as being outside the UK. VAT may or may not be recoverable. • The rules are complex. • 2.Certain transactions such as: • a)A Government grant and SOME subsidies (not if paid in effect • to procure goods or services). This generally applies if nothing • needs to be done in return for the grant. However, if a service is • provided in return then the monies may be taxable. • b)Transactions between companies within the same VAT group. • c)Goods located outside the UK at the time of supply. • d)Transfer of a business as a “going concern”. • e)Compensation e.g. paid by insurance company in respect of • damage of a property. • f)Disbursements (exact sum paid out on behalf of client) • For most businesses, the outside the scope costs are wages and local authority rates, and there are no outside the scope supplies. Outside the scope Aston Hughes & Co. Chartered Accountants

No VAT is due on supplies which are in the exempt category, but then no input VAT is reclaimable. This is the list of groups which are exempt from VAT: 1.Land 2.Insurance 3.Postal services 4.Betting gaming and lotteries 5.Finance 6.Education 7.Health 8.Burial and cremation 9.Trade unions, professionals and other interest bodies 10.Sports, sports competitions and physical education 11.Works of art 12.Fund-raising events by charities and other qualifying bodies 13.Cultural services etc. 14.Goods on which input tax recovery is blocked (e.g. sale of second hand car). 15.Investment gold Exempt Aston Hughes & Co. Chartered Accountants

Exemption covers the grant of any interest in (i.e. can be a sale or a lease) right over (e.g. right of way, mineral right) or any licence (a licence does not have to be in writing) to occupy (no specific period – could be a couple of hours) land (area of any size), other than…. And then there is a long list of exceptions, for which the standard rate applies. “Occupy” is the exclusive occupation of a specific area as distinct from the mere right to use a place for a particular purpose. Land Aston Hughes & Co. Chartered Accountants

Land continued If the rent is exempt and the landlord can therefore not recover the VAT incurred on work on the property but the tenant can, the landlord should consider negotiating a tenant repairing lease, rather than a landlord repairing one. (Note that the landlord cannot specify the work to be done, otherwise the value of the exempt rent will be increased). (The same would apply to a rent free period at the start of the lease). If a tenant sublets a property without the landlord’s permission, HMRC regard this as a standard rated supply, because there is no right of occupation held by the third party. Aston Hughes & Co. Chartered Accountants

1. Sale of freehold commercial and or industrial buildings, if still under construction or within three years of completion 2. Sale of sporting rights (unless included in freehold). A lease which includes sporting rights must be apportioned. 3. Hotel, B&B, Inn, furnished houses or flats for use by visitors or travellers, together with any room provided in conjunction with the sleeping accommodation or for the purposes of a supply of catering – even if these are priced separately. (e.g. a wedding reception). Note that the definition even included a hostel for the homeless. HMRC have accepted that the use of a room for a conference or a function is exempt (even if those attending have a meal and/or sleeping accommodation). 28 day rule for long-stay accommodation Once a stay exceeds 28 days, the value subject to VAT reduces to that of the facilities provided (e.g. cleaning and linen – the minimum value of this is 20%). VAT must also be attributed to any meals provided. The balance of the charges is outside the scope of VAT, not exempt. Land: Exceptions to exemption Aston Hughes & Co. Chartered Accountants

Land: Exceptions to exemption • Holiday accommodation – includes and house, flat, chalet, hut caravan, or tent. • The sale/lease premium of a holiday property is standard rated until the property • is over three years old, and then it is exempt – unless it is opted to tax. • 5. Seasonal pitches for caravans and associated facilities at caravan parks. • 6. Pitches for tents and camping facilities. • 7. Parking facilities: • If a lock-up garage is to be used for storage, the tenancy agreement must expressly • forbid the parking of a vehicle! Aston Hughes & Co. Chartered Accountants

Land: Exceptions to exemption • 8. The right to fell and remove trees • 9. Housing/storage/mooring of aircraft, ships or boats • 10. Boxes, seats, etc at sports grounds, theatres, concert halls etc. • 11. Facilities for playing sport or participating in physical recreation. However, note that a grant of sports facilities for more than 24 hours, or for a series of ten ormore periods (no matter what the total time is) will, put the hire of the facilities back into exemption provided that: • They are for the same activity at the same place. • At intervals of at least a day but not more than 14 days. • Under a written agreement for a single price. • For exclusive use of the facilities. • The customer is a school, club or association or organisation representing affiliated clubs or constituent associations. Aston Hughes & Co. Chartered Accountants

Insurance premiums The exemption includes a block insurance policy which allows the policyholder acting in his name to buy insurance for third parties on terms with the insurer and the third parties under which he then recharges the insurance to those parties. The policy may include cover for the policyholder’s own liability to its customers or members. Examples include a sports organisationwhich provides its members with cover against the risk of injury or liability to another person whilst taking part in an event. However, if insurance is sold in connection with a standard-rated supply of goods or services, by the supplier thereof (or a person connected with him who deals directly with the customer) the insurance related services are standard ratedunless the amount of the premium and the amount of commission paid aredisclosed to the customer. (To prevent artificial pricing e.g. on exempt warranties). A payment made by an insurance company or a broker to a third party is not necessarilyexempt, just because it concerns insurance, it could for example be regarded as advertising, promotion (this is based on a British Horse Society case - it can qualify for exemption, but the recipient has to do more than just include advertising material with its own mail-outs.) or consultancy (e.g. valuation or loss adjusting services). Aston Hughes & Co. Chartered Accountants

Exemptions to an eligible body of education, research (if supplied to another eligible body) and vocational training. Eligible bodies: Schools, colleges, universities, government departments, local authorities, bodies such as charities (which must then plough back any profit made from education). Note thata trading subsidiary is not an eligible body. Education is drafted very widely, It includesholiday sporting and recreationalcourses, etc. (even courses teaching subjects such as ballroom dancing, embroidery and motorcycle training!)and vocational courses. It must be led and directed, not merely be a supervised leisure activity (e.g. a visit to the zoo, a swimming pool or a stately home). For example, there must be instruction in the use of equipment and in warming-up techniques. However the mere presence of staff on health and safety or insurance grounds is not enough. It does not include plays, concerts, sports meetings or exhibitions. Education Aston Hughes & Co. Chartered Accountants

English as a foreign language course Is exempt, whoever provides the services. Includes all elements integral to the course, including sports, recreational or social activities. Private tuition Is exempt, if it is in a subject ordinarily taught in a school or university by an individual teacher acting independently of an employer. i.e by the principal of a business, not an employee. Standard rated if supplied by an employee. This can be apportioned so that some income exempt and some standard rated depending on the amount of teaching by each. Note re the wide drafting of the word education as already discussed! Covers teaching of virtually any sport or outdoor activity! Education Aston Hughes & Co. Chartered Accountants

Closely related goods or services • Are exempt when supplied closely related to education, research or vocational training. • The supply must be for the direct use of the student and supplied by an eligible body. • Education, vocational training and, provided by the same person, any goods or services there are also exempt if ultimately funded by: 1 The Learning and Skills Council 2. The National Council for Education and Training for Wales 3. A Local Enterprise Company 4 European Social Fund • Note there are strict rules which would need consideration Education Aston Hughes & Co. Chartered Accountants

Sports, sports competitions and physical education The following are exempt: 1. Entry fees for competitions in sport or physical recreation where all the fees go towards prizes. 2. Entry fees in such competitions charged by non-profit-making bodies 3. Fees for playing sport or for physical education charged by non-profit-making bodies to individuals. This only applies to services essential to sport or physical education, Sales in the bar are standard rated! (If there is a membership scheme, charges to non-members are standard-rated). The third ones is very useful for genuine sports clubs etc. but beware anti avoidance rules which affect e.g. bodies which try and profit in a different way, such as via charging rents. Aston Hughes & Co. Chartered Accountants

Fund raising events by charities and other qualifying bodies • Supply of goods and services (including advertising to Sponsors) at a fund raising event of a charity or a qualifying body, whose primary purpose is fundraising and which is promoted as such is exempt. • The exemption covers an individual event, as opposed to e.g. the regular opening of a charity shop. • Again, there are complicated rules which would need to be looked at in detail, • Two exclusions being: • Fund raising holidays or day trips covered by the Tour Operators’ Margin Scheme. 2. Any event including more than two nights’ accommodation. Aston Hughes & Co. Chartered Accountants

No VAT chargeable on supplies, but VAT can be recovered on inputs. The Terminal Markets Order zero rates transaction on a large number of terminal markets such as those for metals, rubber, oil, bullion and foods. A highly complex and technical subject! There are 17 groups of zero rated items Includes: food, books, construction of buildings, transport, caravans and houseboats, drugs and medicines, clothing and footwear and a variety of supplies either by a charity or to a charity. Zero Rate Aston Hughes & Co. Chartered Accountants

Food • Zero rating for food is set out in the legislation in four parts: • General items – food is generally zero rated. • Some exceptions – standard rated (e.g. catering and beverages (includes items such as ice cream, frozen yoghurt and chocolate biscuits – but not cake with a chocolate layer! (Jaffa Cakes). Cases on sports energy bars, and on sports drinks (sports drink vs dietary integrator) have gone both ways some being accepted as zero rated, some standard!) • Exceptions to the exceptions – zero rated (e.g. drinks such as milk, tea and coffee, - but not orange juice or bottled water - cakes and biscuits!) 4. Notes – often important to fully understand what is zero and what is not! Aston Hughes & Co. Chartered Accountants

NUTS!!!!! • OR WHAT? 1. Peanuts in shell - zero rated 2. Out of shell - standard rated 3. Add salt – zero rated • Cover in chocolate or yoghurt – standard rated • Roast them – standard rated – unless, of course, they are still in their shell! Aston Hughes & Co. Chartered Accountants

Catering - Standard rated • Food sold for consumption on the premises on which it is supplied. • 2. Hot takeaway food (i.e. Not cold!), however…. • New case: Deliverance Limited has successfully argued that the reason the food was heated was: • to prove to the customer that it was freshly prepared (not for the purpose of the customer eating it hot) • To comply with food safety regulations and to avoid the expense of treating the items differently from other items which had been heated. • It was therefore agreed to be zero rated! • So …. Watch this space, but for now …… Aston Hughes & Co. Chartered Accountants

Animal Feed Food for animals is in general zero-rated, however, one of the exceptions is pet food which is standard-rated. Note that HMRC accept zero rating for food specifically packaged for working dogs, providing that it isn’t sold as equally suitable for all breeds and sizes of dog! Aston Hughes & Co. Chartered Accountants

Books, booklets, brochures, pamphlets, leaflets and newspapers: Again not always easy to define, but generally, if it is held in the hand and is reading matter, it will be zero rated. Letter headings, calendars and greeting cards are standard rated. (A book in electronic form is standard rated – except talking books for the blind). Aston Hughes & Co. Chartered Accountants

Connected with ships and aircraft and the transport of people and goods. Generally covers: larger aircraft and ships, transport of ten or more passengers, and transport of people to and from a place outside the UK. It also applies to charities providing rescue services at sea etc, e.g. lifeboats and associated equipment. Beware, zero rating may cover only specific services in limited circumstances. “Fun transport” supplied by tourist attractions are standard rated. Pleasure boats and private aircraft are standard rated, as are ships designed or adapted for recreation or pleasure. Again there are several cases concerning whether transport/chartering of transport is zero or standard rated. There are also cases concerning whether there is one supply at one rate, or two supplies at differing rates (e.g. the supply of meals (i.e. catering) during transportation). Transport Aston Hughes & Co. Chartered Accountants

Caravans and Houseboats Caravans over the legal towing size (i.e. residential) and houseboatswithout a means of propulsion are zero rated but not the supply of the contents such as fixtures and furnishings (unless they qualify as building materials when fitted to a house). A single zero rated supply was rejected by the European Court of Justice in Talacre Beach Caravan Sales Limited, the supply has to be apportioned. The leasing of accommodation in residential caravans or houseboats is zero rated. short-term accommodation is not. Aston Hughes & Co. Chartered Accountants

Drugs, medicines, and aids for the handicapped etc. Numerous items which includes: zero-rate aids for the disabled (work to facilitate the use of a building, or specialised equipment), whether supplied to the handicapped person direct or to a charity. Note that the zero rating is worded very carefully to cover very limited circumstances only: The aids must be specifically designed for use by handicapped people. (“Handicapped” means chronically sick or disabled). Note also who the customer is – It does not apply to the landlord of a disabled person, nor to aclub providing facilities for disabled persons. The zero rating only applies to the handicapped person’s home or to a charity in its home or day centre for handicapped persons. Aston Hughes & Co. Chartered Accountants

Charities • Zero rated supplies include: • Donation of goods to a charity or its trading subsidiary • Sale of goods by a charity of goods donated to it (bought in goods are standard rated). • Export of goods by a charity. 4. Supply of relevant goods (mainly medical equipment, handicapped persons aids, etc) to a relevant body (i.e. hospitals, NHS bodies of various kinds, etc). • Again, there are complicated rules which would need to be looked at in detail. Note that the supplier must obtain evidence that the supply is to a charity to be eligible for zero rating. Thus the charity should supply a certificate to the supplier, using specific wording. Aston Hughes & Co. Chartered Accountants

Clothing and footwear Children’s clothing, including protective boots and helmets (including cycle helmets) The law requires it to be designed for young children and not suitable for older persons. i.e. Size alone does not determine whether the clothing is zero rated. Moccasins were held to be standard rated because there was no evident feature for young children. The hearing concluded that 60% of UK women could wear shoes of size 5 or less despite the notice stating that zero-rating was acceptable up to size 5½! Aston Hughes & Co. Chartered Accountants

The 5% Rate Applies to 11 groups including the following: Domestic fuel and power (includes use by a charity for non business purposes. Residential conversions Smoking cessation products Contraceptive products Children’s car seats Mobility aids and their installation in domestic properties. for the elderly Welfare advice or information (this doesn’t affect the exempt supply given by an eligible body) and various others Aston Hughes & Co. Chartered Accountants

Standard Rates As a rule of thumb, all supplies are standard-rated, unless legislation specifically exempts, zero rates or reduced rates them. Costs recharged, such as travel expenses and postage form a part of the main supply and are therefore usually standard rated when charged on to a client, Likewise if one business loans employees to another and just recharges the wages, this would generally be a standard rated supply (not if one business merely runs the payroll for another, or there is a secondment of staff at no profit). Restaurant owners are liable for VAT on service charges unless they are voluntary and given to the staff. Aston Hughes & Co. Chartered Accountants

It is possible to make two or more supplies at different rates of VAT within a single price. Is this: 1. A multiple supply at different rates of VAT or 2. A composite supply consisting of two or more elements which is really a single supply with the dominant element deciding the rate of tax, (the other elements being considered as merely ancillary • A tricky decision???? One supply or two? Aston Hughes & Co. Chartered Accountants

Some decided cases: • Manchester United included a match day programme in its hospitality package. Programmes were also being sold separately inside the venue. The club treated the supply of the hospitality package as two separate supplies. (The sales of programmes being zero rated, the hospitality pack standard rated). The case was taken to a tribunal which agreed with HMRC. The full price of the package was a consideration for asingle supply of standard-rated hospitality. • Providing a meal on an air flight is considered to be incidental to the air transport and asingle supply of zero rated transport. • Catering on a luxury train was considered aseparate standard rated supply. • A river boat providing entertainment and catering was deemed to be aseparate supply of transport (zero rated) and separate supplies of catering and entertainment! Multiple or single supply? Aston Hughes & Co. Chartered Accountants

Multiple or single supply? • Providing grazing, water and general care for a horse is a single standard-rated supply of the care and supervision of it (not partly zero rated for the animal feed element. In this case, the horse was there to be served by a stallion. • Exactly the same services were provided in a livery yard. These were held to be a single supply which was an exempt licence to occupy the stable. • (HMRC had agreed that the DIY stabling was exempt, but challenged the full livery ones). Aston Hughes & Co. Chartered Accountants

FOR VAT REGISTRATION PURPOSES IT IS ONLY THE MARGIN WHICH IS COUNTED TOWARDS THE THRESHOLD • TOMS is supposed to be a simplification measure which helps tour operators account for VAT only in their home country. • It was instigated by an EC directive. • It applies to anyone who • buys in and resells travel facilities • for the direct benefit of a traveller, regardless of whether the facilities are used for holiday or business purposes. (e.g. Many schools can come within TOMS when organising school trips) • It does not apply to: • 1. A disclosed agent (i.e. when the customer knows that his contract is with someone else, e.g. a hotel directly, and he knows that he is not buying the hotel booking from the agent. • 2. Supplies not packaged with a margin scheme supply. • Supplies to business customers for subsequent resale. 4. Supplies incidental to other supplies. Tour Operator’s Margin Scheme (TOMS) Aston Hughes & Co. Chartered Accountants

A margin scheme package includes one or more of the following margin scheme supplies: • Accommodation (including tents, caravans and even a space/pitch on a site) • Passenger transport • Hire of transport • Trips • Tour Guides • Use of special lounges at airports. • TOMS applies if one of the above is bought in • and re-supplied without material alteration, • by a tour operator • for the direct benefit of the traveller. TOMS continued Aston Hughes & Co. Chartered Accountants

TOMS applies wherever the tour takes place, UK and EC tours are standard rated. Outside the EC is zero rated. • VAT cannot be reclaimed on margin scheme supplies bought in for resale. • VAT is accounted for on the difference between the VAT inclusive purchase price and the selling price. • There are special rules for determining the place, liability and time of margin scheme supplies. • VAT invoices cannot be issued for margin scheme supplies and these must have wording stating, in effect, that TOMS has been applied. • There are special rules for calculating the VAT due on the margin. The calculations are a legal requirement and involve an annual calculation, rather than calculations on each individual holiday. 6. As already commented, the value of turnover for VAT registration purposes is the margin. • The place of supply for a TOMS supply is where your business is based for us: UK TOMS continued Aston Hughes & Co. Chartered Accountants

TOMS continued • In-house costs • All the costs used to calculate the VAT inclusive margin in the TOMS scheme must have been bought in. • If the tour operators own facilities are used, for example his own hotel, as part of the package, the package price has to be split between bought-in and in-house supplies. The tour operator will then account for this supply in the normal way for VAT purposes and can recover input VAT in the normal way. • If the tour operator owns a coach and runs trips into Europe or it owns a hotel in another EU country, for example, it may have to register in that EU country for VAT. • Note that the registration thresholds are generally much lower than ours – and that they generally have fewer or no items subject to zero VAT. Aston Hughes & Co. Chartered Accountants

The end result is: • The EU country retains the VAT where the services are enjoyed (VAT on hotels, meals, excursions, entertainment etc). • UK gets the tax on the gross profit margin. • The tour operator can recover VAT on UK overheads and other non direct expenses. • The end result for the tour operator is similar to what would have been the case if VAT had been charged on the supply in full, and all input VAT recovered. Note that the annual accounting scheme can be used for TOMS, but it is specifically excluded from the flat rate scheme. Note also that cancellation fees are outside the scope of VAT because no supply is made to the customer. TOMS continued Aston Hughes & Co. Chartered Accountants

Again these changes have been brought in to comply with EU law: 1. Business to Business Sales - When a travel service is sold to another business for onward sale, it must be done under normal VAT rules not TOMS. (HMRC used to allow tour operators to opt in to TOMS to ease administration). 2. Supplies to Businesses for their own consumption - Tour operators were allowed to opt out of TOMS for these supplies. It allowed businesses (e.g providing holidays for their best salesmen) and LEAs (providing school trips) to reclaim the VAT. These sales must now be within TOMS and no VAT can be recovered. 3. It is a legal requirement to use the market value for in-house supplies. A cost plus basis cannot be used except where this accurately reflected the structure of the package (package needs to be marked up on a fixed basis for this to apply), or if it is not possible to obtain a market value. • The place of supply for a TOMS supply is where your business is based for us: UK Changes in place from 1st January 2010 Aston Hughes & Co. Chartered Accountants

Package travel, package holidays and package tours regulations (1992) • Anyone who offers for sale (other than occasionally) package holidaysmust comply with the Package Travel Regulations 1992. • Legislated under a European Directive with the intention of protecting customers. • A “package” is: • A pre-arranged combination of at least two of the following: 1. Transport. 2. Accommodation. 3. Tourist services which are not “ancillary to” transport or accommodation and account for a significant portion of the package, (e.g. day trips). • A package must be sold at an all-inclusive price when it covers a period of more than 24 hours or includes overnight accommodation. Aston Hughes & Co. Chartered Accountants

Package travel, package holidays and package tours regulations (1992) • The package travel regulations set out what information needs to be provided at the beginning of the contract. • Separate invoicing of the different components does not change the fact that it is a package, nor does the fact that the consumer has given specific instructions as to what elements to include in the package. • There is much controversy over whether a package put together by an individual over the internet is subject to these rules. • If a package falls under the regulations, the tour operator must make suitable alternative arrangements at no extra cost to the customer should a significant proportion of the services contracted for not be available. Where he is unable to do so, he mustcompensate the customer. • The organiser is liable for the failures of hoteliers, suppliers and services within the contract. • The latter being a good reason for any tour operator to become a member of one of the protection agencies such as ABTA and trading as a limited company!! Aston Hughes & Co. Chartered Accountants

A business must register if it makes: • Taxable supplies (20%, 5% or 0%, but not exempt or outside the scope) • As a taxable person (i.e one who is registered or should be registered) 3. In the course of furtherance of any business. (A catch all phrase, but excludes e.g. sale of private household furniture by a business man) • A business may be: • sole trader, • partnership, • LLP, • limited company , • club, • society, • charity, • or even a committee set up to organise one event could be caught. • There is no requirement to be intending to make a profit. VAT is a tax upon transactions, not on profits. VAT Registration Aston Hughes & Co. Chartered Accountants

VAT Registration continued • A business must register for VAT if: • Its taxable outputs (not exempt, non-business or outside the scope) supplies have exceeded the registration limit in the previous 12 calendar months (Unless HMRC can be satisfied that the following 12 months will not exceed a figure £2,000 under the registration limit (which is currently £70,000). • There are reasonable grounds for thinking that the taxable outputs in the next 30 days will exceed the limit. (Designed to catch large “one-off” transactions e.g. a builder selling a standard rated property). 3. It takes over a business under the “transfer of a going concern” rules. (The turnover of the vendor is taken into account). • If a business makes only or mostly zero rated supplies it can apply for exemption from registration – but then will not, of course, be able to recover any VAT on its purchases. Aston Hughes & Co. Chartered Accountants

VAT Registration continued • Note that the sale of a capital asset such as office equipment, or a van etc, does not count towards the limit, but the sale or lease of a building on which the option to tax has been exercised does. • A business must inform HMRC within 30 days of exceeding the threshold and will be registered from the first of the following month. • A “rolling” 12 months total of turnover must be maintained. • i.e. If turnover goes over the threshold in January, HMRC must be informed by the end of February, and the business registered from 1 March. • If registered re the next 30 day period rules, registered from the 1st of the month in which the threshold is expected to be exceeded. • Note that it is gross turnover which is measured, not net income, e.g. holiday lets, which are received net of an agent’s commission, need to be “grossed up” • Under the second-hand goods scheme, it is the value of the supply, i.e the turnover which is taken into account (even though VAT is only accounted for on the margin!) Aston Hughes & Co. Chartered Accountants

Note that if a business registers too early, it cannot retrospectively deregister and request repayment of the VAT paid. • Late registration can incur a penalty of up to 15% of the net tax due from the date a business should have registered to the date it was actually registered. • If the sales of a business are below the limit, it can apply to register voluntarily, thus enabling it to reclaim any input tax incurred. (A business cannot register if all its outputs are exempt). • This is only likely for businesses selling primarily to other VAT registered businesses. • Alternatively, if a business is likely to become registered and is currently incurring large bills e.g. on set up, it may be advantageous. Registration may also add “credibility” to a business! • On registration a business can recover VAT which was paid on: • Assets used in the business and goods for resale held at the date of registration and which were bought with the last four years. 2. Services received for the purpose of the ongoing business within the previous six months (e.g. repair of machine still used in the business). VAT Registration continued Aston Hughes & Co. Chartered Accountants

It is sometimes possible to keep two businesses separate, so that at least one of them is out of VAT. • This must be done properly with written agreements, separate records etc. They must be sufficiently at arms length from each other and have normal commercial relationships with each other. • Otherwise HMRC could show that they were never, in fact, separate, and VAT would be due on all turnover from the time that this was above the VAT threshold. If the business can be shown to be separate, but HMRC are “satisfied” that the activities in question are all part of the same business, they can issue a “directive” that the two businesses be combined for VAT purposes. This is not retrospective. • A business can deregister if: • Outputs in last 12 months have been below the registration threshold. • HMRC can be persuaded that turnover in the next 12 months will be £2,000 below the registration limit. • The business will be in a VAT reclaim position • Do this promptly. HMRC will not backdate the deregistration. VAT Registration continued Aston Hughes & Co. Chartered Accountants

SHOULD YOU PAY VAT?

SHOULD YOU PAY VAT?

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