VAT: Top 10 Tips for small businesses and start-ups

By Marcus Ward 11 March 2024

At some point it is likely that a small business or start-up will need to consider VAT. Here are a few pointers:

Should you be registered for VAT?

If your income is above £90,000 pa of taxable supplies, you have no choice. But you can voluntarily register if below this threshold. There are significant penalties for failure to register at the correct time.

Advantages of VAT registration: VAT recovery on expenses plus, perhaps; gravitas for a business
Disadvantages: administration costs plus a potential additional cost to customers if they are unable to recover VAT charged to them (eg; they are private individuals) which could affect your competitiveness Potential for penalties and interest for getting it wrong.

VAT reliefs for charities – A brief guide

By Marcus Ward 24 October 2023

Charities and Not For Profit (NFP) entities – A list of VAT reliefs in one place

Unfortunately, there is no “general” rule that charities are relieved of the burden of VAT.

In fact, charities have to contend with VAT in much the same way as any business. However, because of the nature of a charity’s activities, VAT is not usually neutral and often becomes an additional cost. VAT for charities often creates complex and time consuming technical issues which a “normal” business does not have to consider.

There are only a relatively limited number of zero rated reliefs specifically for charities and not for profit bodies, so it is important that these are taken advantage of. These are broadly:

advertising services* received by charities
purchase of qualifying goods for medical research, treatment or diagnosis
new buildings constructed for residential or non-business charitable activities
self-contained annexes constructed for non-business charitable activities
building work to provide disabled access in certain circumstances
building work to provide washrooms and lavatories for disabled persons
supplies of certain equipment designed to provide relief for disabled or chronically sick persons

* HMRC have set out its views on digital/online advertising in Revenue and Customs Brief 13 (2020): VAT charity digital advertising relief.

There are also special exemptions applicable to supplies made by charities:

income from fundraising events
admissions to certain cultural events and premises
relief from “Options to Tax” on the lease and acquisition of buildings put to non-business use
membership subscriptions to certain public interest bodies and philanthropic associations
sports facilities provided by non-profit making bodies

Although treating certain income as exempt from VAT may seem attractive to a charity, it nearly always creates an additional cost as a result of the amount of input tax which may be claimed being restricted. Partial exemption is a complex area of the tax, as are calculations on business/non-business activities which fundamentally affect a charity’s VAT position.

The reduced VAT rate (5%) is also available for charities in certain circumstances:

gas and electricity in premises used for residential or non-business use by a charity
renovation work on dwellings that have been unoccupied for over two years
conversion work on dwellings to create new dwellings or change the number of dwellings in a building
installation of mobility aids for persons aged over 60

Additionally, there are certain Extra Statutory Concessions (*ESCs) which benefit charities. These zero rate supplies made to charities, these are:

certain printed stationery used for appeals
collection boxes and receptacles
lapel stickers and similar tokens, eg; remembrance day poppies

* ESCs are formal, published concessions but have no legal force.

We strongly advise that any charity seeks assistance on dealing with VAT to ensure that no more tax than necessary is paid and that penalties are avoided. Charities have an important role in the world, and it is unfair that VAT should represent such a burden and cost to them.

VAT: HMRC partial exemption guidance updated

By Marcus Ward 18 September 2023

VAT Notice 706 has been updated on 14 September 2023 and the option to send an email to get an approval for a partial exemption special method has been removed from sections 6.2, Appendix 2 and how to apply.

Para 6.2 – “Get approval for a special method

You cannot change your method without our prior approval. You must continue to use your current method, whether that is the standard method or a special method, until we approve or direct the use of another method or direct termination of its use.

You can get approval for a special method by using the online service.

If you are unable to use the online service, contact VAT Written Enquiries team by post.

You must explain clearly how your proposed method will work, you should see Appendix 2 in this guide.

When you propose a special method you must include a declaration that the method is fair from its effective date of application, and for the foreseeable future so that from its effective date a fair amount of input tax is recovered”.

Examples of special methods (PESM) are:

sectors and sub-sectors
multi pot
time spent
headcount
values
number of transactions
floor space
cost accounting system
pro-rata
combinations of the above methods

Partial Exemption guidance here

VAT: Alternative Dispute Resolution (ADR) What is it? How does it work?

By Marcus Ward 15 September 2023

What is ADR?

ADR is the involvement of a third party (a facilitator) to help resolve disputes between HMRC and taxpayers. It is mainly used by SMEs and individuals for VAT purposes, although it is not limited to these entities. Its aim is to reduce costs for both parties (the taxpayer and HMRC) when disputes occur and to reduce the number of cases that reach statutory review and/or Tribunal.

The process

Practically, a typical process is; HMRC officials and the facilitator meet with the taxpayer and adviser in a room, and agree on what the disputes are. They then retire to two separate, private rooms, and the facilitator goes between the two parties and mediates on a resolution.

ADR is a free service and the only costs the taxpayer will incur are fees from their advisers on preparation and any representation they require on the day.

Features of ADR

Without prejudice discussions – Anything said or documents produced during the ADR process cannot be used in future proceedings without the express consent of both parties subject to the obligations placed on the parties by the operation of English law
Evidence is that ADR can work for both VAT and Direct Taxes disputes both before and after an appealable decision or assessment has been made. However, ADR for VAT disputes is more suited to post appealable decision and assessments
Memorandum of Understanding (MOU) and a Code of Conduct – a MOU is created to commit taxpayers/agents to the requirements of the ADR process
The average time for all completed ADR cases is 61 days. This figure is from application to resolution. The average elapsed time for VAT it is 53 days
The average age of VAT disputes is eight months
An ADR Panel has been created to accept or reject applications for ADR. It screens all applications and not just those where ADR was thought to be inappropriate.
Customer / Agent Questionnaire Summary – Findings from customers and agents included:
- An appreciation of the personal interaction that the ADR process allowed
- Facilitators were even handed and impartial in all cases and kept the taxpayer well informed
- ADR was particularly well suited to resolution of long standing disputes.

Is Tribunal preferable?

Taking a case to Tribunal is often an expensive, complicated and time consuming option, but used to be the only option open to a taxpayer to challenge a decision made to HMRC. From personal experience, the number of cases from which HMRC withdraw “on the steps of the court” illustrate a weakness in their legal procedures and possibly a lack of confidence in presenting their cases. This is very frustrating for our clients as they have already incurred costs and invested time when HMRC could have pulled out a lot earlier. Of course, our clients cannot apply for costs. The sheer number of cases going through the Tribunal process means that there are often very long and frustrating delays getting an appeal heard.

A true alternative?

Therefore, should we welcome ADR as a watered down version of a Tribunal hearing? Or is it actually something else entirely?

HMRC say that “ADR provides an excellent opportunity for Local Compliance to handle disputes in a modern and collaborative way. It is not intended to replace statutory internal review which is an already established process aimed at resolving disputes without a tribunal hearing. Review looks at legal challenges to decisions whereas ADR is more suitable for disputes where there might be more than one tenable legal outcome”.

Results so far

After an initial two-year pilot which shaped the final programme, and was guided by a Working Together group that included CIOT, AAT, ICAEW and legal representatives HMRC concluded that “ADR has shown that many disputes, where an impasse has been reached, can be resolved quickly without having to go to tribunal.” And “ADR is a fair and even-handed way of resolving tax disputes between HMRC and its customers and helps save time and costs for everyone.” Ignoring the dreadful use of the word “customers”… what has the profession made of the scheme?

Hui Ling McCarthy – Barrister has reported “HMRC’s ADR studies have produced extremely encouraging and positive results – owing in large part to HMRC’s willingness to engage with taxpayers, advisers and the professional bodies and vice versa. Taxpayers involved in a dispute with HMRC would be well-advised to take advantage of ADR wherever appropriate”.

Outcome

So what was the outcome of the two year scheme? The headline is that 58% of cases were successfully resolved, 8% were partially resolved and 34% were unresolved.

Of the fully resolved facilitations

33% were resolved by educating the taxpayer/agent about the correct tax position.
24% were resolved due to the facilitator obtaining further evidence.
23% were resolved by educating the HMRC decision maker about the correct tax position.
20% were resolved through facilitators restoring communication between both parties.

Conclusion

These figures are encouraging and the conclusion that; well planned, constructive meetings, with the intervention of an HMRC facilitator, do increase the chances of dispute resolution, appear to be well founded.

Further, the fact that the project team saw no evidence of any demand from HMRC, taxpayers or their agents for access to external mediators and that there is also conclusive evidence from taxpayers that HMRC facilitators have acted in a fair and even-handed manner add to the feeling that ADR is a useful new tool.

Commentary

The comments from HMRC on ADR is (probably understandable) positive. However, reactions from the profession and taxpayers who have gone through the process are equally generous on ADR as a mechanism for settling disputes.

My view is that any alternative to a Tribunal hearing is welcome and even if ADR works half as well as reports conclude then it should certainly be explored. It should definitely be considered as an alternative to simply accepting a decision from HMRC with which a taxpayer disagrees.

Recovery of VAT on company cars

By Marcus Ward 3 July 2023

Further to our guide to the recovery of input tax on motoring expenses we are often asked about the specifics of a business acquiring a motor car. So, this article sets out the different rules.

Purchase of a car

If a business purchases a car outright, regardless of how this is funded, no input tax is claimable at all. However, If the taxpayer is either a taxi or driving instructor business, VAT falls to be 100% recoverable.

Hire Purchase (HP)

This is treated as a supply of goods as the ownership of the car passes at the end of the agreement. Similarly, to an outright purchase, input tax is blocked for all taxpayers except taxi and driving instructor businesses.

Lease hire

If the car is ‘qualifying car’, and is returned at the end of the agreement it is a supply of services; a lease. There is a specific rule which means that 50% of the VAT is recoverable on the rental payments if it is used for business purpose. The 50% block is to cover the private use of the car. Again, a 100% reclaim is possible if it is to be used for hire with a driver for carrying passengers or providing driving instruction.

The 50% block applies to all the VAT on charges paid for the rental of the car. This includes:

optional services — unless they’re supplied and identified separately from the leasing supply on the tax invoice
excess mileage charge — if it forms part of a supply of leasing but not if it was incurred on an excess mileage charge that forms part of a separate supply of maintenance

Personal Contract Purchase (PCP)

This is a little more complex because a PCP can either be treated as a supply of goods (the car), or a supply of services (a lease) depending on the terms of the contract. The following treatment is based on the Mercedes Benz Financial Services case.

The difference between services or goods:

This distinction depends on the level of the final payment. This is known as the Guaranteed Minimum Future Value (GMFV).

Services

If the final optional payment (known as a balloon payment) is set at or above the anticipated market value (the GMFV) of the car at the time the option is to be exercised, the contract will be deemed a supply of leasing services with VAT on each instalment. A business can therefore recover 50% of input tax on each monthly payment. A balloon payment is the final “lump sum” which the agreement sets out is to be paid if a customer chooses to own the car at the end of the agreement.

Goods

If the final optional payment is set below the anticipated market value, such that any rational customer would choose to buy the car, the contract is a supply of goods with a separate supply of finance. VAT is therefore due on the supply of goods in full at the beginning of the contract and the finance element is exempt. In such cases input tax is 100% blocked.

The distinction

It is often difficult to distinguish between services and goods in relation to PCP cars. We find that the wording of contracts is often arcane and unhelpful (and not particularly drafted with VAT in mind). If the supply is not determinable by reference to the agreement documentation, a simple and practical solution is to consider the invoice. Broadly, if it is a lease the supplier will charge VAT on the monthly payments, but a purchase would mean VAT is charged in full up front at the tax point.

Input tax on repairs

If a vehicle is used for business purposes, there is a 100% reclaim of the VAT charged on repairs and maintenance as long as the business paid for the work and the vehicle is used for some business purposes. It does not matter if the vehicle is used for some private motoring or if a business has chosen not to reclaim input tax on road fuel.

VAT: Discounts – value of supply. The TalkTalk case

By Marcus Ward 11 January 2023

In the First Tier tribunal (FTT) case of TalkTalk Telecom Limited the issue was the amount of consideration received on which output tax was due. Specifically, whether “prompt payment discounts” which were offered, but not taken up by customers, reduced the value of a supply.

Background

TalkTalk offered most of its retail customers the option of receiving a 15% discount on its services if their monthly bills were paid within 24 hours.

TalkTalk accounted for output tax on the basis that the consideration received was reduced by the discount, whether or not customers had in fact paid within the 24 hours. In other words; whether or not the discount had actually been applied so that customers paid less.

The appellant considered that this approach was consistent with Value Added Tax Act 1994, Schedule 6 Para 4(1), which provides:

“Where goods or services are supplied for a consideration in money and on terms allowing a discount for prompt payment, the consideration shall be taken for the purposes of section 19 as reduced by the discount, whether or not payment is made in accordance with those terms.”

HMRC’s contention was that the offer only reduced the consideration for VAT purposes where customers had actually paid the reduced amount, and that there was no reduction when the discount was not taken up.

Decision

The above legislation only applies to services supplied “on terms allowing a discount for prompt payment”. In deciding whether this was the case in this appeal the FTT analysed the contractual position.

The contracts were governed by terms and conditions (T&Cs) published on TTL’s website. This discount was not referred to in the T&Cs, but on a separate dedicated page within the same website.

The judge decided that the discount contractual term comes into existence at exactly the same moment as the payment and the supply. There was not a contractual term under the T&C’s under which a lower amount was payable if payments were made earlier. On this point, TalkTalk contended that the T&Cs were varied by the subsequent discount option, and, as a result, the services had been “supplied…on terms allowing a discount for prompt payment” as required by Para 4(1), but this argument was rejected.

As per the Virgin Media Upper Tribunal case the Tribunal considered that the position was different between services billed in advance, and services billed in arrears.

Advance payments

The contractual variation did not include an offer for the customer to pay a discounted amount at some point in the future, so Para 4(1) did not apply to services billed in advance.

Payment in arrears

The FTT ruled that customers accepted the discount offer after delivery of the services. The supply had therefore been made on the terms set out in the T&Cs, and the customer was therefore contractually required to pay the full amount. The discount option was an offer by the appellant to accept a lower sum with an earlier payment date to discharge that pre-existing contractual obligation. As a matter of law, this was an offer to accept a post-supply rebate of consideration already due and therefore it could not be a discount.

The appeal was dismissed.

Commentary

Another case which highlights both the complexity of the rules on consideration and the importance of contracts. At stake here was VAT of £10,606,226.00 which was deemed to be underpaid during a four-month period only. If in doubt – take advice!

VAT: New penalties and interest for late returns and payments

By Marcus Ward 4 November 2022

Further to my article on the introduction of changes to penalties for late filing and payments of VAT and follow up guidance, the forthcoming introduction on 1 January 2023 has focussed attention on how they will impact certain businesses.

Late returns

Many businesses who have had to deal with the “old” default surcharge regime realised that it could be disproportionate and create unfair outcomes. The new penalties are, in my view, fairer, and, the changes bring some welcome features and some which are less so.

The good news is that the introduction of the new rules mean that businesses will start with a clean slate, regardless of their position under the default surcharge mechanism – there is no carry over form one set of rules to another.

However, for the first time, late rendering of returns can incur penalties and interest if the returns are either:

nil, or
repayment

In the previous regime when “non-payment” returns were filed late, this did not trigger a default.

Nil returns

Businesses which did not carry out any activity in the prescribed period, eg; intending traders, businesses temporary closed, or at the end of their life will have to recognise that a late nil return will now trigger points.

Repayment returns

Again, businesses which typically submit repayment returns, such as; new build constructors, exporters, and any business supplying zero rated goods or services will have to recognise tardy submissions will now affect them.

We understand that HMRC is aware of the impact on this sector and is planning to communicate with these businesses to make them aware of the new changes.

An additional point; from 1 March 2021 the Domestic Reverse Charge was introduced for the construction industry. As a result, an increased number of builders found themselves in a repayment position and will now need to ensure timely returns to avoid penalties.

Late payments – penalties and interest

The new late payment penalties regime will replace the default surcharge, which served as a combined late submission and late payment sanction.

Under the new rules, there will be two separate late payment penalties.

The first penalty has two separate elements:

2% of the VAT unpaid at day 15
a further 2% of the VAT unpaid at day 30

The second penalty is triggered from day 31. This is charged daily and is based on an annual rate of 4% of any outstanding amount.

If all outstanding VAT is paid within 15 days of the due date, no late-payment penalty will arise. Although here will however still be late payment interest.

Interest

From 1 January 2023, HMRC will charge late-payment interest from the day a VAT payment is overdue to the day the VAT is paid, calculated at the Bank of England base rate plus 2.5%.

Time-to-Pay arrangements

HMRC offers the option of requesting a Time To Pay arrangement. This will enable a business to stop a penalty from accruing any further by approaching HMRC and agreeing a schedule for paying their outstanding tax.

Period of familiarisation

HMRC say that to give businesses time to get used to the changes, it will not be charging a first late payment penalty for the first year from 1 January 2023 until 31 December 2023, if the tax is paid in full within 30 days of the payment due date.

Appeals

It is anticipated that the number of appeals against late filing/payments will be reduced because of the more proportional approach of the new rules. However, it is still possible to appeal if a taxpayer considers the imposition of penalties and interest is unfair. An appellant needs a reasonable excuse to succeed.

Action

Advisers should ensure that clients affected by the new rules, specifically repayment business and those submitting nil returns, are aware of the impact. I know that a lot of these are habitual late filers and some “save up” returns for when they need a cash injection.

It will also be prudent for advisers to monitor penalty points accrued. We understand that HMRC is looking at how this information could be made available to agents and taxpayers. We expect more details about this in the coming months, including how software can be used to display points.

Repayment supplement

The new system may be fairer, however, the withdrawal of the repayment supplement is not! More details here. (I am still quite cross!)

VAT: Global Accounting simplification

By Marcus Ward 10 May 2022

VAT: Second Hand Scheme – Global Accounting simplification

Overview

The problem with the VAT Second-Hand Goods Scheme is that details of each individual item purchased, and then later sold, has to be recorded. This requirement can lead to a lot of paperwork and an awful lot of administration which, obviously, many businesses are not too keen to comply with.

Global Accounting is an optional, simplified variation of the Second Hand Margin Scheme (MS).

It differs from the standard MS because rather than accounting for the margin achieved on the sale of individual items VAT is calculated on the margin achieved between the total purchases and total sales in a particular accounting period without the requirement to establish the mark up on each individual item. It is beneficial if a business buys and sells bulk volume, low value eligible goods, and is unable to maintain the detailed records required of businesses who use the standard MS.

There two significant differences in respect of Global Accounting compared to the standard MS. The first difference is that losses on an item are automatically offset against profits on items. Thus losses and profits are offset together in the period. In the standard MS no VAT is due if a loss is made on an item, but that loss cannot be offset against any other profit. There is also a timing advantage with Global Accounting because all purchases made in the period are included, even if those goods are not actually sold in the same period.

Goods which may be included in Global Accounting

Global Accounting can be used for all items which are eligible under the standard MS. However, the following goods cannot be included in Global Accounting:

individual items costing more than £500 (although these can be accounted for via the standard MS)
aircraft, boats and outboard motors,
caravans and motor caravans,
horses and ponies, and
motor vehicles, including motorcycles; except those broken up for scrap.

Starting to use the scheme

When a business starts using Global Accounting, it may find that it already has eligible stock on hand. It may include the value of this stock when it calculates the total purchases at the end of the first period. If a business does not take its stock on hand into account, it will have to pay VAT on the full price, rather than on the margin achieved, when it is sold.

Note: any goods bought on an invoice which shows a separate VAT figure are not eligible for resale under the scheme.

The calculation

VAT is calculated at the end of each tax period. Because you can take account of opening stock in your scheme calculations, you may find that you produce a negative margin at the end of several periods. In other words, your total purchases may exceed your total sales. In such cases, no VAT is due. But you must carry the negative margin forward to the next period as in the following example:

Period One

a) Total purchase value of stock on hand 10,000
b) Total purchases 2,000
c) Total sales 8,000

Margin = c – (a+b) = (4,000)

Because this is a negative margin there is no VAT to pay. However, negative margin must be carried forward into the next period as follows:

Period Two

a) Negative margin from previous period 4,000
b) Total purchases 1,000
c) Total sales 7,000
d) Margin = c – (a + b), sales minus (purchases plus negative margin), £7,000 – (£1,000 + £4,000) 2,000
e) VAT due = margin (£2,000) × VAT fraction (1/6) 333.33

There is no negative margin to carry forward this time. Therefore, in the third period, the margin is calculated solely by reference to sales less purchases.

The negative margin may only be offset against the next Global Accounting margin. It cannot be offset against any other figure or record.

Global Accounting Records and Accounts

A business does not need to keep all the detailed records which are required under the normal MS – for instance, you do not have to maintain a detailed stock book.

Global Accounting records do not have to be kept in any set way but they must be complete, up to date and clearly distinguishable from any other records. A business must keep records of purchases and sales as set out below, together with the workings used to calculate the VAT due.

If HMRC cannot check the margins declared from the records, VAT will be due on the full selling price of the goods sold, even if they were otherwise eligible for the scheme.

Buying goods under Global Accounting

When a business buys goods which it intends to sell under Global Accounting it must:

check that the goods are eligible for Global Accounting
obtain a purchase invoice. If a business buys from a private individual or an unregistered entity, the purchaser should make out the invoice at the time the goods are purchased. If purchased from another VAT-registered dealer, the dealer must make out the invoice at the time of sale, and
enter the purchase details of the goods in your Global Accounting purchase records. The purchase price must be the price on the invoice which has been agreed between you and the seller.

You cannot use the scheme if VAT is shown separately on the invoice.

If you are buying from a private individual or an unregistered business, you must make out the purchase invoice yourself.

When selling goods under Global Accounting

If the purchase conditions above apply, Global Accounting may be used when the goods are sold by:

recording the sale in the usual way
issuing a sales invoice for sales to other VAT-registered dealers and keeping a copy of the invoice, and
transferring totals of copy invoices to the Global Accounting sales record or summary
you must be able to distinguish at the point of sale between sales made under Global Accounting and other types of transaction

Leaving the scheme

If a business stops using Global Accounting for any reason, it must make a closing adjustment to take account of purchases for which it has taken credit, but which have not been sold (closing stock on hand). The adjustment required does not apply if the total VAT due on stock on hand is £1,000 or less. In the final period for which the business uses the scheme, it must add the purchase value of its closing stock to the sales figure for that period. In this way VAT will be paid (at cost price) on the stock for which the business previously had credit under the scheme.

Items sold outside the scheme

If goods are sold which had been included in a business’ Global Accounting purchase (for example, they are exported), a business must adjust its records accordingly. This is done by subtracting the purchase value of the goods sold outside the scheme from the total purchases at the end of the period.

Stolen or destroyed goods

If a business loses any goods through breakage, theft or destruction, it must subtract their purchase price from your Global Accounting purchase record.

Repairs and restoration costs

A business may reclaim the VAT it is charged on any business overheads, repairs, restoration costs, etc. But it must not add any of these costs to the purchase price of the goods sold under the scheme.

For further advice on any global accounting, used goods schemes, or any other special VAT schemes please contact me.

VAT: Motoring costs – A guide

By Marcus Ward 8 April 2022

VAT Basics

Nearly all businesses incur car motoring expenses, so here is a guide to the VAT impact:

Buying a car

A business cannot recover the VAT on a car purchase, unless it:

is a stock in trade of a motor manufacturer or dealer
is a taxi, driving instruction car, or self-drive hire
will be used exclusively for the purposes of your business and would not be made available for the private use of anyone

Leasing a car

If a business leases a ‘qualifying car’ for business purposes it will normally be unable to recover 50% of the VAT charged. The 50% block is to cover the private use of the car.

However, a 100% reclaim is possible if it is to be used for hire with a driver for carrying passengers or providing driving instruction.

The 50% block applies to all the VAT on charges paid for the rental of the car. This includes:

optional services — unless they’re supplied and identified separately from the leasing supply on the tax invoice
excess mileage charge — if it forms part of a supply of leasing but not if it was incurred on an excess mileage charge that forms part of a separate supply of maintenance

Fuel

The options for claiming input tax on road fuel are as follows:

claim 100% of the VAT charged. This is possible if fuel is bought for business motoring only or for both business and private motoring and the appropriate fuel scale charge (see below) is applied on the value of supplies of fuel for private use
use detailed mileage records to separate business mileage from private mileage and only claim for the business element
claim no input tax

Road Fuel Scale Charge

A scale charge is a way of accounting for output tax on road fuel bought by a business for cars which is then put to private use. If a business uses the scale charge, it can recover all the VAT charged on road fuel without having to split mileage between business and private use. The charge is calculated on a flat rate basis according to the carbon dioxide emissions of the car. The charges are set out in the fuel scale charge table.

Mileage records

HMRC calculation example:

Total mileage: 4,290
Business mileage: 3,165
Cost of fuel: £368.
Business mileage: £368 × (3,165 ÷ 4,290) = £271.49
Claimable input tax: £271.49 × VAT fraction = £45.25

Fuel paid for by employees

If a business reimburses its employees for fuel used it can treat the VAT they paid as its input tax. But the business must be able to show that it has reimbursed them for their actual expenditure on the fuel. If fuel bought by employees for business is put into private use, the business must account for output tax on the private use using the scale charges or the value.

Electric vehicles

Details of input tax recovery and output tax due here.

Input tax on repairs

If a vehicle is used for business purposes, there is a 100% reclaim of the VAT charged on repairs and maintenance as long as the business paid for the work and the vehicle is used for some business purposes. It does not matter if the vehicle is used for private motoring or if you have chosen not to reclaim VAT on road fuel (see below).

Other motoring expenses

Input tax incurred on all other business motoring expenses, eg; fleet management charges or parking charges is fully recoverable input tax.

Selling a car

If a car is sold on which input tax was recovered, eg; a driving school car, VAT is due on the full selling price. The supply of these vehicles are cannot be made under the second hand margin scheme.

If a car is sold where VAT was charged on purchase but could not be recovered there is no VAT due on the sale of it. Such a supply is exempt and must be consider in any partial exemption calculation. For most businesses this will not be an issue.

If a business sells a car where VAT was not charged when it was purchased, eg: from a private individual or from a dealer who sold it under the second-hand margin scheme, no VAT will be due unless the sale was at a higher value than the purchase price. In which case VAT will be due under the margin scheme.

NB: The VAT rules for commercial vehicles will differ.

VAT: Land and property exemptions

By Marcus Ward 5 August 2021

Further to my article on VAT: Land and property simplification and HMRC’s call for evidence the ICAEW has reiterated its call for all VAT land and property exemptions to be abolished and recommends the removal of all VAT options.

ICAEW also concludes that following the UK’s departure from the EU the government is in the best position since the introduction of VAT to thoroughly review the structure of the tax.

ICAEW also suggests that all land and property transactions should subject to VAT at either the standard rate or reduced rate, other than those relating to domestic property which should remain zero rated. This approach would remove many of the complexities of the current regime, it concludes.

Commentary

This is one area of the tax that is crying out for simplification and the case put forward by ICAEW has its merits. In my view, the Government should go further and review many complexities of the tax. As one example, the rules in respect of the sale of food products is ridiculously complex and produces odd and unexpected outcomes. Also, other exemptions would benefit from reconsideration, particularly financial services and insurance, but I suspect that the current government has a lot on its plate, much of it of its own making.