We aim to answer your VAT questions and outline what there is and is not VAT on.
What Is VAT?
VAT stands for value added tax, and while it may look easy to understand at first, it can quickly become complicated.
Particularly, for business owners who need to navigate both the VAT on sales and the costs of the VAT.
VAT will be part of the charge on sales for a specified rate and will be based on a quarterly VAT return.
The charges from the supplier will also be on the VAT return.
The difference between the VAT on sales and the cost?
Well, if cost reaches a higher level than sales, then the amount in VAT will be refunded.
If the relationship is reversed, then the VAT will be paid to the HMRC.
To do this, you need to make sure that you register your company for VAT.
It’s important to understand that VAT registration is not the same as company status.
The VAT threshold
VAT registration will be required if the turnover is over the current threshold.
At the moment the VAT threshold is set at £85,000.
You can register voluntarily, or you can delay registering by moving trade to a limited company.
There also various VAT schemes to consider as well for companies dealing with VAT.
For instance, you can use a flat rate scheme which simplifies VAT a great deal.
This will be accepted by the HMRC with a turnover of anywhere under 150K, but it must be approved before it can be used.
Alternatively, for retail companies, there are retail schemes that can prove to be useful or you can use a cash accounting scheme.
This can help you to delay the payment to the HMRC.
While this makes accounting a little more difficult, it can be used by businesses up to £1.35 million.
Partial exemption from VAT
You might also find you can use a scheme that includes partial exemption from VAT.
For instance, certain rents will not be included.
This will involve calculations on what can and can’t be reclaimed.
What Can I Claim VAT Back On?
A lot would be the short answer, so perhaps it’s best to think about how you can make sure that you can reclaim VAT.
To do this, you need to make sure that you have a VAT invoice.
This should include your business name, the amount in a VAT and the VAT number for a supplier.
You will not need an invoice for all charges.
Parking charges and telephone
For instance, parking charges and telephone will not require one if they are less than £25.
Company cars
While the company cars might be exempt certain services are not including maintenance and servicing for any commercial vehicle.
Commercial vehicles
Also, if you have bought commercial vehicles purely for purposes in your business, you can claim.
Fuel
Fuel too is held within the same category so make sure you take advantage of this.
Some items are quite peculiar when it comes to claiming back on VAT.
Food
For instance, food can be claimed back on if it’s hot, but cold food is exempt.
Food can also only be claimed if it is related to subsistence.
This means it has a business purpose such as a lunch with a client.
A good rule of thumb is if the meeting involving the cost is at least five miles away from the hub of your company.
Entertainment
You might have heard that entertainment is blocked from VAT reclaims, and while this is true, it does not include the entertainment of your employees.
So, this means everything from a small office party to a trip to the theatre can certainly be included.
Gifts
Gifts can be reclaimed as long as the cost is less than £50 which is why most businesses ignore this completely because the return is so little, it’s barely worth it.
Ultimately, you will find various services and products are suitable for reclaims.
You just need to make sure that they were used for business purposes and that they have a valid VAT invoice.
There are, however, some areas and items that you can not claim VAT back on.
What Can’t I Claim Vat Back On?
Many items do not have VAT included.
As such, you do not need to worry about reclaiming VAT.
Examples include :
- Train tickets
- Stamps
- Various books
- Interest
- Salaries
- Purchases from someone who is not VAT registered
- Businesses that do not have a business registration
Other items do have VAT but cannot be reclaimed, and this includes entertainment costs as well as the cost for cars.
You can not claim on a variety of products that the HMRC have listed as a business.
These include any goods and services that you use to make VAT exempt supplies and anything that is explicitly for private use.
Assets that are transferred under a going concern to your business can also not be claimed on.
Whether or not you can claim VAT back will also depend on when you registered your company.
For instance, you will be able to claim on services that you use six months before you registered or goods purchases three years before that are still owned.
What About VAT And EU And Non-EU Countries?
Many businesses trip up here because it does get quite complicated.
If you are selling to a customer who is not within the EU, then you can expect a VAT transaction to have a rate of 0%.
However, if you are selling to customers in the EU, you need to make sure that you do include this in box 8 for your VAT return.
You should also make sure that it is on the EC Sales List.
For services offered, the sale will be based on the location of the customer.
So, if they are not within the UK and are a business that has no presence at all in the UK, then no VAT will be charged for the transaction.
As such, you don’t have to include on the VAT return.
You do however need to make sure it is on the EC sales list.
This is for a business to business transaction.
On the other hand, you might be selling a product to a customer outside the UK.
If that’s the case, then you will need to make sure that you are charging UK VAT, regardless of where they are in the world.
Only certain services are exempt from this including advertising.
It’s important to understand that these are only general rules.
As such, there are various exceptions that do not follow the same guidelines.
This includes electronic services, entertainment, transport and services related to land to name just a few.
What About VAT On Digital Sales?
First, we need to make sure that you know what digital sales are.
This can include anything that is supplied via the internet and may including music, software, TV shows, games or apps.
Digital sales are particularly interesting because according to EU law, the company must charge the customer the level of VAT that relates to their location.
So, that means that you might charge anything from 25-15% in VAT.
This only impacts companies selling digital products to customers, not B2B companies.
To verify their location, you will need an IP address, sim card country code or a billing address.
We hope this provides you with all the information you need to understand VAT in your company, how to reclaim and when you will need to charge VAT to customers or clients.
Navigate this issue correctly, and you will be able to save a lot of money on your business costs.
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