Getting Your VAT Right
With the new Making Tax Digital rules upon us and VAT returns being a focus right now, here’s a handy guide to the most common VAT errors and how to avoid them to ensure your affairs are correct.
1. Accounting records
Sometimes businesses are not sure about the records they should be keeping for VAT purposes. It is necessary to keep all invoices and receipts for at least six years so that in the event of an inspection by HMRC you are able to prove all the figures on the VAT returns submitted. VAT inspections can happen to all sizes and types of businesses, so it is wise to be prepared. Here are our top tips;
Request a VAT receipt for business purchases as you can only reclaim VAT if you have a supporting invoice or receipt, showing the VAT number and VAT paid. Retailers may assume that you are not a business so may not give a VAT receipt unless requested, and may then only show the VAT rate applicable for each item rather than the VAT amount, which is fine.
You can reclaim the VAT on pre-registration goods and services as long as they are directly related to the business and the goods purchased are still in use when the business becomes VAT registered or were used to make other goods, which you still have. You can go as far back as six months for services and four years for goods purchased provided you have the VAT receipt.
There are apps available now such as ReceiptBank, which we recommend to our clients, that enable you to capture the correct VAT amount and also allow you to digitally store the bill just by taking a picture of it on your phone. This is very useful as it can link to and automatically update your cloud accounting software without you having to store large amounts of paper receipts.
Keep an eye on your turnover. All businesses should review their gross turnover on a rolling twelve month basis. This means that you calculate the turnover for the twelve month period which finishes at the end of each month. If your turnover crosses the VAT threshold (currently £85,000) in any rolling twelve month period, you will most likely need to register for VAT, so you should be aware of the VAT implications surrounding your particular business in case exemptions apply. Don’t wait until your accounts are being prepared by your accountant as you could receive hefty penalties if you register late.
Most VAT registered businesses use either cash or accrual/invoice accounting. This is usually a choice, depending on turnover, but it needs to be applied consistently. If you are using cash accounting for example, you cannot reclaim the VAT on a purchase you have made if you have only received the invoice and not yet paid for it. In a nutshell, it must be consistent! The cash accounting method is useful especially if your clients take a bit longer to pay since you will only have to pay over the VAT to HMRC when you actually receive the payment from your client, so can be better for cashflow.
3. Not all business expenses are allowable or have VAT charged on them
Many costs are not VATable or can’t have the VAT recovered, and this could be easy to make a mistake on, especially for new business owners. You cannot just claim VAT back on everything and should make yourself familiar with what is allowable. Although this is not exhaustive, here are some typical examples where you cannot claim the VAT;
Business entertaining is not allowable and the basic rule is that you cannot reclaim VAT on such costs. Entertaining can include things like tickets bought for clients for sporting events, concerts or theatre for example, as well as gifts or food and drink. Generally, client entertaining would refer to anything more than basic refreshments accompanying a meeting.
Insurances attract insurance premium tax, which is completely separate from VAT and therefore cannot be reclaimed.
Most travel expenses do not include VAT, such as bus, train, tube, plane and most taxis. Check the receipt to be certain around taxis.
VAT is an EU wide tax. Suppliers in other EU countries may charge you VAT in their country, which is not UK VAT and cannot be reclaimed on a UK VAT return. For some services provided from Europe, if you provide them with your VAT number, they can charge you without VAT.
4. Complex transactions – get assistance
In most cases a VAT liability is easily calculated by deducting the VAT on business expenses from the VAT on income. There are however many cases where it is more complicated. Examples of these may be businesses where the partial exemption rules apply, such as some medical and pharmaceutical services. Another area which can be complex is land and property, including buying, selling and letting properties, and construction services. Even invoicing overseas can become complicated. If you are unsure, you should seek professional advice.
5. Making Tax Digital
MTD is now here and applies to you if your business is VAT registered and the turnover is over the current VAT threshold of £85,000 on a rolling twelve month basis. You will have to file your VAT returns digitally using a software that is compatible with HMRC’s portal. Be aware that once you have registered for MTD, it is permanent. If you find that you have crossed the threshold, you should register for MTD as there will be penalties for not registering on time or not registering at all. Don’t leave it too late! Read more about MTD here.
HMRC penalties can be high so it can be costly to make mistakes. We recommend that you keep yourself informed and stay one step ahead. Using a cloud accounting package can allow you to set rules for certain types of costs and means that an incorrect spreadsheet formula won’t trip you up. If you are unsure, seek professional advice. If you’d like to refer to our guidance sheet, you can download this here.
It is our recommendation that you seek independent professional advice and do not treat this article as advice specific to you, this is for general guidance.
FUSE is an independent Chartered Certified firm of accountants and tax advisors based in Highgate Village, North London. We provide a dynamic range of services to clients working in property, media, entertainment and professional services. Our clients vary in size from self employed sole traders, small enterprises and medium size businesses. We believe that comprehensive financial planning and sound business financial advice are the keys to growth and profitability.