Partial Exemption
Directly attributable expenses to taxable supplies will be recoverable in full. Therefore, if input VAT has been incurred solely in relation to the making of taxable supply, all of this will be recoverable. If, however, input tax has been incurred solely in relation to the making of exempt supply then this is not recoverable (subject to de-minimis rules, covered later) There will also be input VAT leftover, residual input VAT, not directly attributable to either taxable or exempt supplies (VAT on accountancy fees, for example). As a partially exempt business, you will need to use one of the approved methods below to work out how much of your residual input VAT can be recovered. The Standard Method or Special Method The default, Standard Method, uses the split between taxable and exempt turnover in the business as the basis for calculation. For example, if a business had a turnover of £100,000 in a quarter, with £80,000 of this relating to taxable supply (vatable sales) and £20,000 relating to exempt supplies (non-vatable sales), then 80% of the residual input VAT would be recovered and the remaining 20% will not be recoverable. If you have rental income figures, you could calculate the percentage based on the revenue which may be advantageous to you, depending on the figures. However, if the Standard Method is deemed not to give a fair and reasonable result, then you could apply to HMRC to use a Special Method for calculation. Possible special methods include transaction based, staff apportionment or square foot, however HMRC may not accept these and any special method would need to be accepted by HMRC. The de-minimis limit When the input VAT attributable to exempt supply (both directly and through residual calculation) is below the de-minimis limit then all the input VAT incurred in that quarter is recoverable. The following 2 conditions should apply to be below the de-minimis limit:
Annual Adjustment Partially exempt businesses completing their VAT on a monthly or quarterly basis should do a partial exemption working for each period to ensure that they remain below the de-minimis limit in the period. If the de-minimis limit was breached in a month or a quarter and VAT was not recovered but overall the de-minimis limit for the period was not breached then this input VAT becomes recoverable now, however if the de-minimis limit is breached on the annual calculation then any input VAT attributable to exempt supplies recovered previously would become repayable to HMRC. If you have any questions about VAT please contact us on info@intact-accounting.co.uk.
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VAT registration and how to register was discussed in a previous blog which you can read here.
When you register for VAT you will either be on “Standard Accounting” or “Cash Accounting”. “Standard Accounting” or sometimes referred to as “Invoice Accounting” is when you have to pay VAT when you raise an invoice. The advantage here is that you also can reclaim input VAT at soon as you receive an invoice form your suppliers even if you haven’t yet paid that supplier. “Cash Accounting” is when you pay VAT to HMRC on output vat and claim back on input vat at the point in which an invoice is paid. This could provide your business with a cash low advantage. Example John is a bookkeeper. He issues an invoice on the 30th March for £100 + VAT which means £120 sales invoice. Assuming John’s quarterly VAT deadlines are 31st March, 30th June, 30th September and 31st December. The client pays John on the 1st April so the invoice falls into the quarter ending 31st March but the payment fall into the quarter ending 30th June. He would have to pay £20 to HMRC by the 30 April or the 7th May if he file’s and pays online. But if he was on cash accounting he would only have to pay the £20 by 31st July or the 7th August if he was filing online. This would give him the advantage of keeping the cash for four months before having to pay HMRC. Also if say the client doesn’t pay John at all then if john was on “Cash Accounting” he wouldn’t have paid HMRC and no harm was done, however if he was on “Invoice Accounting” then he would have to wait 6 months before he can write off the bad debt even if say the client has gone out of business due to bankruptcy and John knows the client won't pay. For further information please contact us on info@intact-accounting.co.uk. All businesses in the UK are required to register for VAT when their turnover reaches certain limits set by the government. For the tax year 2015/16 this threshold is set at £82,000.
The current rate of VAT charged on most services and goods is set at 20%, although certain supplies are “zero rated” or “exempt”. In the case of “zero rated” supplies you don’t charge output VAT but you can reclaim your input VAT suffered on both services and goods received, however if the supply is “exempt” then you don’t charge or claim back any VAT. It may be advantageous to register for VAT if you sell mainly to VAT registered businesses even if you haven’t reached the VAT registration threshold. To register for VAT you, or your accountant, would have to complete and sign a VAT 1 form and send to HMRC. The process usually takes between 6 – 8 weeks to complete. All businesses must register for VAT once they reach the threshold in a year. When you are fully registered for VAT you need to show your VAT registration number on all your invoices, you should always ask for a VAT invoice from your suppliers to claim back the VAT suffered on services or goods purchased. Good record keeping is a must to complete your VAT return correctly. This is done once every quarter for as long as you are VAT registered. There is one more thing that needs to be considered before registering for VAT and that’s what VAT scheme would suit your business most. We will be discussing different VAT schemes in next blogs. Click here to read. For further information please contact us on info@intact-accounting.co.uk. |
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