Tag Archives: property

VAT – An important ECJ case which will affect charities – Sveda

By   28 October 2015
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A benefit to charities?

In the case of Sveda (C-126/14) which was recently heard by the European Court of Justice (ECJ) the issue was whether input tax was recoverable on the construction of a recreational woodland path which ended at a shop that Sveda owned and made taxable supplies from. Full case here

90% of the construction costs were met by Grant received from the Lithuanian Ministry of Agriculture on the condition that the path was made available free of charge to the public for a period of five years.  There was no dispute that the grant was outside the scope income for Sveda.

The authorities disallowed the VAT claimed on 100% of the costs on the grounds there was no link to taxable supplies since free access is a non-economic activity because there was no consideration paid to use the path.  Alternatively, there was a contention that only 10% of the VAT should be reclaimed, since the company only met 10% of the cost.

Sveda argued that, although the path could be used free of charge, the purpose was increase taxable sales from its shop (food, drink and souvenirs). This meant there was a link between the VAT incurred and its economic activity as a whole.

The ECJ rejected the view that the input tax should be blocked in its entirety or in part. Its view was that the expenditure was incurred with the intention of carrying out an economic taxable activity, even if there was no direct link to any one specific supply and use of the path was free. The VAT was overhead VAT. No exempt supplies (that would break the chain of deduction) took place.

So, although the path was used for a non-business activity (free access) the ECJ deemed that the input tax incurred on the costs of building the path was deductible. As there was a link to economic activities the VAT is treated as overhead and, in this case, fully recoverable.

Although Sveda is a commercial company and the decision will no doubt be of assistance to commercial entities, there may be a significant impact on charities and NFP organisations.  This judgment highlights the basic right to deduct VAT where a link to taxable supplies made by a taxable person can be demonstrated. It does not matter whether the link is to one taxable supply or to all the taxable economic activities. The non-business use of the asset did not prevent recovery.  The outcome would no doubt have been different if Sveda was only involved in building the path and just providing free access to it without also selling items form the shop.

On a personal note, this case has echoes of one I took to Tribunal for The Imperial War Museum – with a similar successful outcome. HMRC views here

Let’s hope it will be just as useful for the taxpayer as the landmark IWM decision.

If you think you, or a charity you are aware of, or a client of yours may be affected by this decision, please contact me. This may be the case if the charity undertakes both business and non-activities.  I would always counsel that a charity should have its activities reviewed from a VAT perspective.  There are usually savings that could be made.

More on our charity services here

VAT Land and Property – Why Opt To Tax?

By   5 October 2015
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Opting to tax provides a unique situation in the VAT world. It is the sole example of where a supplier can choose to add VAT to a supply….. or not.

VAT free supplies

The sale or letting of a property is, in most cases, exempt by default. However it is possible to apply the option to tax (OTT) to commercial property. This has the result of turning an exempt supply into a taxable supply at the standard rate.  (It is not possible to OTT a residential property).

Why opt?

Why would a supplier then deliberately choose to add VAT on a supply?

The only purpose of OTT is to enable the optor to recover or avoid input tax incurred in relation to the relevant land or property. The OTT is a decision solely for the property owner or landlord and the purchaser or tenant is not able to affect the OTT unless specific clauses are included in the lease or purchase contracts. Care should be taken to ensure that existing contracts permit the OTT to be taken.  Despite a lot of misleading commentary and confusion, it is worth bearing in mind that the recovery or avoidance of input tax is the sole reason to OTT.

Once made the OTT is usually irrevocable for a 20 year period (although there are circumstances where it may be revisited within six months of it being taken).  There are specific rules for circumstances where the optor has previously made exempt supplies of the relevant land or property. In these cases H M Revenue & Customs’ (HMRC) permission must usually be obtained before the option can be made.

Two part process

The OTT is a two part process.

  • The first part is a decision of the business to take the OTT and it is prudent to minute this in Board meeting minutes or similar. Once the decision to OTT is taken VAT may be added to a sale price or rent and a valid tax invoice must be raised.
  • The second part is to formally notify HMRC (after obtaining permission if necessary).  The form on which this is done is a VAT1614A. Here

There can be problems in cases where the OTT is taken, but not formally notified.

Disadvantages

The benefit of taking the OTT is the ability to reclaim input tax which would otherwise fall to be irrecoverable. However, one disadvantage is that opting the sale or rent of a property may reduce its marketability as it is likely that entities which are unable to recover VAT would be less inclined to purchase or lease an opted property.

Another is that the payment of VAT by the purchaser may necessitate obtaining additional funding. This may create problems, especially if a VAT charge was not anticipated. Even though, via opting, the VAT charge is usually recoverable, it still has to be funded up front.

Also, an OTT will increase the amount of SDLT payable when a property is sold. This is always an absolute cost.
Transfer Of a Going Concern (TOGC)

I always say that advice should be taken in all property transactions and also in cases of a Transfer of A business as a Going Concern (TOGC). This is doubly important where an opted building is being sold, because TOGC treatment only applies to a sale of property when specific tests are met.

Property transactions are high value and often complex. The cost of getting VAT wrong, or overlooking it can be very swingeing indeed. I have also seen deals being aborted over VAT issues.  For these reasons, please seek VAT advice at an early stage of negotiations.

More on our land and property services here

VAT Reliefs for Charities. A brief guide.

By   3 August 2015
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Charity and Not For Profit entities – a list of VAT reliefs.

Unfortunately, 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 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 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;

There are also special exemptions available for 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;

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.

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

I have to charge myself VAT?!

By   1 July 2015
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I have to charge MYSELF VAT?!

How comes?!

Well, normally, the supplier is the person who must account to the tax authorities for any VAT due on the supply. However, in certain situations, the position is reversed and it is the customer who must account for any VAT due. Don’t get caught out!

Here are just some of the situations when you have to charge yourself VAT:

Purchasing services from abroad

These will be obtained free of VAT from an overseas supplier. What is known as the ‘reverse charge’ procedure must be applied. Where the reverse charge procedure applies, the recipient of the services must act as both the supplier and the recipient of the services. On the same VAT return, the recipient must account for output tax, calculated on the full value of the supply received, and (subject to partial exemption and non-business rules) include the VAT charged as input tax. The effect of the provisions is that the reverse charge has no net cost to the recipient if he can attribute the input tax to taxable supplies and can therefore reclaim it in full. If he cannot, the effect is to put him in the same position as if had received the supply from a UK supplier rather than from one outside the UK. Thus creating a level playing field between purchasing from the UK and overseas.

Accounting for VAT and recovery of input tax.
Where the reverse charge procedure applies, the recipient of the services must act as both the supplier and the recipient of the services.  On the same VAT return, the recipient must
      1. account for output tax, calculated on the full value of the supply received, in Box 1;
      2. (subject to partial exemption and non-business rules) include the VAT stated in box 1 as input tax in Box 4; and;
      3. include the full value of the supply in both Boxes 6 and 7.
Value of supply: The value of the deemed supply is to be taken to be the consideration in money for which the services were in fact supplied or, where the consideration did not consist or not wholly consist of money, such amount in money as is equivalent to that consideration.  The consideration payable to the overseas supplier for the services excludes UK VAT but includes any taxes levied abroad.
Time of supply: The time of supply of such services is the date the supplies are paid for or, if the consideration is not in money, the last day of the VAT period in which the services are performed.

Purchasing goods from another EC Member States

Something similar to reverse charge; called acquisition tax, applies to goods purchased from other EC Member States. These are known as acquisitions (they are imports if the goods come from outside the EC and different rules apply). The full value of the goods is subject to output tax and the associated input tax may be recovered by the business acquiring if the goods are used for taxable purposes. If you‘re not already registered for VAT in the UK and acquire goods worth £82,000 or more in the UK from other EC countries, you will have to register for VAT in the UK on the strength of the value of the acquisition tax. A business will also have to complete an Intrastat Supplementary Declaration (SDs) if its acquisitions of goods from the EC exceed an annual amount – currently £1.5 million.

Intrastat_flow_diagramMore details on Intrastat Supplementary Declarations here

Deregistration

Any goods on hand at deregistration with a total value of over £1,000 on which input tax has been claimed are subject to a self supply. This is a similar mechanism to a reverse charge in that the goods are deemed to be supplied to the business by the business and output tax is due. However, in these circumstances it is not possible to recover any input tax on the self supply.

Flat Rate Scheme

There is a self supply of capital items on which input tax has been claimed when a business leaves the flat rate scheme (and remains VAT registered).

Mobile telephones

In order to counter missing trader intra-community fraud (‘MTIC’), supplies of mobile ‘phones and computer chips which are made by one VAT registered business to another and valued at £5,000 and over are subject to the reverse charge. This means that the purchaser rather than the seller is responsible for accounting for VAT due.

Land and buildings…. and motor cars

There are certain circumstances where land and buildings must be treated as a self supply… but that is a whole new subject in itself… as is supplies in the motor trade.

Even if the result of a self-supply or reverse charge is VAT neutral HMRC is within its rights to assess and levy penalties and interest in cases where the charge has not been applied; which always seems unfair.  However, more often than not simple accounting entries will deal with the matter…. if the circumstances are recognised and it is remembered to actually make the entries!

VAT – Compound or multiple supplies? Latest from the courts

By   17 March 2015
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In Colaingrove Limited the Upper Tribunal (UT) this week was required to decide whether the supply of electricity to a mobile home was an independent supply, or just one element of part of an overall supply of holiday accommodation.

This is a notoriously difficult area of VAT as the recent case of WM Morrison Supermarket Limited (“Morrisons”) demonstrates.  In this case disposable barbecues (standard rated) were sold with charcoal (reduced rated when sold independently) and the UT decided that it was not possible to carve out the reduced rated element form the overall supply so the whole supply was standard rated.

In Colaingrove a flat-rate charge was made to holidaymakers who paid it as part of the hire charge for self-catering accommodation in mobile homes.  The appellant argued that the electricity charge was separately identifiable and quantifiable and should consequently be treated as a reduced rated (5% rather than 20%) independent supply.

The logic in Morrisons was applied in this case and the UT ruled that the charge for the electricity should properly be included in the price of the standard rated holiday accommodation.  The charge should not be split out, so the entire charge for the accommodation was standard rated, including the specified sum charged for the electricity.

The judge acknowledged that this case was not an easy one to decide and that the arguments advanced on behalf of the taxpayer were both powerful and attractive. It would seem likely that an appeal to the Court of Appeal will be made.

This case further illustrates that care must be taken when analysing the VAT treatment of supplies.  There is significant case law on this matter, but there still remains a certain overlap and sometimes conflicting opinions.  The precise facts of the matter are very important when determining whether supplies are compound or multiple for VAT purposes.

Overview

Whether there is a compound or multiple supply is determined by the tests set out in the Card Protection Plan case, namely; firstly, whether there is a principal element of the supply to which all other parts are ancillary and, secondly, whether, in the eyes of the customer, the ancillary element provides a means of better enjoying the principal element. If the answer to both of these questions is yes, then there is a single supply.

What I’ve learned about VAT – The Top 10 lessons

By   13 March 2015
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I know that anybody who has ever met me will find it difficult to believe (!) but I have been involved with VAT for over 20 years. So what are some of the things that I have learned in this time? Here are ten of the biggest lessons I’ve learned so far:

  1. Errors – If you get it wrong it can be very, very expensive.  Not only in terms of paying back tax, penalties and interest, but also the time and resources needed to deal with VAT issues. It can often have a profound impact on business transactions too. If VAT isn’t properly considered during negotiations or the contact stage it could be that a business suffers an unexpected 20% reduction of income or an added burden of irrecoverable input tax.
  2. HMRC Errors – HMRC sometimes get it wrong. One only has to look at case law to find that HMRC’s interpretation of the legislation and their introduction of new domestic legislation has resulted in unfair burdens on the taxpayer. Consequently, it is always worthwhile looking to challenge any “unhelpful” decisions by HMRC and indeed, past errors by the department often provide an opportunity to make retrospective claims for VAT plus interest.
  3. Complexity – VAT was introduced all those years ago as a “simple tax”. The fact is that VAT is now, and has always really been, extremely complex and ever-changing. It is likely that this complexity will increase. As a comparatively “young tax” it will continue to develop, be challenged, be abused, be open to conflicting interpretation and need to change as a result of technology, new products and trading patterns.
  4. Timing – More than any other tax, legal issue or accounting procedure timing is critical in VAT. Because VAT is a transaction based tax timing is crucial and there is rarely the opportunity to carry out retrospective planning. If a taxpayer is even “one day out” in certain circumstances it could add VAT to a hitherto VAT free transaction. Of course, filing or paying VAT late also results in surcharges. The best VAT motto is: Right tax, right time.
  5. Exemption – For a business exemption is a burden not a relief. It will, in nearly all cases, mean that any business which makes exempt supplies will suffer the burden of irrecoverable input tax. Added to this is the complexity of partial exemption calculations and often the rigmarole of agreeing a partial exemption method with HMRC.
  6. Doubt – Increasingly obtaining a ruling from HMRC is difficult. Changes to the way that HMRC approach requests for a determination or clearance means that a taxpayer who is eager to get the technicalities correct will just be referred to a published guidance. This is very unhelpful and uncertainty is a very dangerous thing in the VAT world.
  7. Compliance – The vast majority of businesses want, and try, to get it right. This is hardly an earth-shattering observation, but it is often not a view shared by HMRC – despite some published statements. It is reasonable that HMRC inspectors should challenge VAT treatments and establish whether declarations are credible, after all we as individual taxpayers have an interest that all VAT due is collected, but experience insists that sometimes it is difficult to dislodge an opinion formed by an inspector in cases where a business has actually accounted for VAT correctly.
  8. Charities – Charities have a hard time of it with VAT. It is an unfortunate fact that VAT wasn’t really designed for them, so they have to “fit in” with the VAT system. This means that, compared to most businesses, they have to deal with more complex issues and ultimately, in nearly all cases, VAT will represent a real cost to them, thus reducing the available funds for them to carry out their work. There are some reliefs for charities, but these are of limited value and are very specific.
  9. Planning – The objective of VAT planning is to legitimately defer payment to HMRC until the latest time possible. The converse of this of course, is to obtain any repayments of VAT due from HMRC as soon as possible. It is also important to avoid VAT representing an actual cost and taking advantage of any beneficial UK and EC legislation, determinations, guidance, case law and Business Briefs etc available. There are “off the shelf” – one size fits all schemes and also aggressive planning available BUT these should be approached with the utmost caution. I have often been called in to deal with the aftermath of such schemes and have seen the consequences of a business signing up to these products without a full understanding of their impact and the business’ relationship with HMRC.
  10. VAT Bubble – It is sometimes tempting to look at VAT in isolation. However, it is important to remember that VAT does not exist in a vacuum and that structures/planning may impact on other tax and/or commercial positions. I am fortunate to work with great direct tax people and it is important to us that our clients get a proper holistic advice.

On advisers – I will leave the last word to the famous Red Adair (younger readers – ask your parents) “If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur.”

So there you have it – what I’ve learned about VAT in 10 lessons.  Make sure you are aware! (Or know a VAT consultant who is!).

 © Marcus Ward Consultancy Limited 2015

VAT – Overseas Holiday Lets: A Warning

By   27 February 2015
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Do you own property overseas which you let to third parties when you are not using it yourself?

It is important to understand the VAT consequences of owning property overseas.

The position of UK Holiday Lets

It may not be commonly known that the UK has the highest VAT threshold in the EC. This means that for many ‘sideline’ businesses such as; the rental of second or holiday properties in the UK, the owners, whether they are; individuals, businesses, or pension schemes, only have to consider VAT if income in relation to the property exceeds £81,000 pa. and this is only likely if a number of properties are owned.

It should be noted that, unlike other types of rental of homes, holiday lettings are always taxable for VAT purposes.

Overseas Holiday Lets

Other EC Member States have nil thresholds for foreign entrepreneurs.  This means that if any rental income is received, VAT registration is likely to be compulsory. Consequently, a property owner that rents out a property abroad will probably have a liability to register for VAT in the country that the property is located.  Failure to comply with the domestic legislation of the relevant Member State may mean; payment of back VAT and interest and fines being levied. VAT registration however, does mean that a property owner can recover input tax on expenditure in connection with the property, eg; agent’s fees, repair and maintenance and other professional costs.  This may be restricted if the home is used for periodical own use.

Given that every EC Member State has differing rules and/or procedures to the UK, it is crucial to check all the consequences of letting property overseas. Additionally, if any other services are supplied, eg; transport, this gives rise to a whole new (and significantly more complex) set of VAT rules.

A final word of warning; I quite often hear the comment “I’m not going to bother – how will they ever find out?”

If an overseas property owner based in the UK is in competition with local letting businesses, those businesses generally do not have any compulsion in notifying the local authorities. In addition, I have heard of authorities carrying out very simple initiatives to see if owners are VAT registered. In many resorts, income from tourism is vital and this is a very important revenue stream for them so it is well policed.

VAT on residential developments

By   20 February 2015
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Should work on existing residential property have the same VAT treatment as new build housing? 

The UK cannot create a new zero rate, however, should, say, the reduced rate apply to extensions/redevelopment?

And if so, where should the line be drawn?

Article from Property Week here

VAT implications of renewable energy sources

By   15 January 2015
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If you own land and install solar panels (which we shall use as an example, although the rules apply equally to any way of generating renewable power), it is relatively straightforward; as you are either consuming the power, or are the provider supplying electricity back to the National Grid.

Where the position may get slightly more complicated is where a solar panel business buy the ‘space’ to install energy producing equipment from someone else. Many businesses are renting the roof space from others upon which to install the solar panels. The businesses may pay the roof owners with ‘free’ electricity in return for renting out this space. Supply of electricity to the owners of the site

For a solar panel business leasing a site, the supply of electricity to the owners of that site is deemed to be a supply of goods.

The business installing the solar panels is the taxable person (if they are, or should be registered for VAT) and they are supplying the owners of the site with a ‘cheap’ supply of electricity in the course of the furtherance of their business.

The supply of electricity for domestic use is a reduced-rate supply under Group 1 of Schedule 7A VATA 1994. The reduced rate of VAT is 5%. If the site owner is using the electricity for domestic purposes then the reduced rate of 5% should apply. If the electricity is being used for business purposes then the supply becomes standard-rated at 20%. However, if there is mixed use, then so long as more than 60% of the use is domestic then the whole supply will be treated as ‘qualifying use’ ie; domestic, and the 5% will apply to the entire amount. Generally speaking, VAT charged at 5% is fully or partly irrecoverable by the recipient.

So in this scenario, the land owner is providing something in exchange for this electricity use; the land owner is giving the solar panel business the use of his land. Therefore this is ‘consideration’ for a service; even if it is ‘non-monetary’ consideration.

This means that the solar panel business will have to calculate a value for this consideration and then charge 5% (or 20%) VAT as necessary, on this amount if they are VAT registered.

The value placed on this non-monetary consideration is not usually a concern for the land owner making the supplies of this land, as this land supply is itself exempt from VAT.

The supply of the land
This is a supply of land by the owner of the site. Unless the land has been ‘opted to tax’ (OTT) then this supply will be exempt from VAT. If the land has been OTT by the landowner – the parties will need to look at the valuation of the (non-monetary) consideration as this will be subject to VAT at 20%. If there is no OTT and the supply is exempt; for a non-VAT registered person, this will have no impact, and this income will not be included in taxable supplies which count towards the VAT registration threshold. If a VAT registered entity makes exempt supplies of land, consideration must be given to his partial exemption position.

VAT consequences of the Feed-In Tariff
In recognition of the higher cost of producing electricity in this manner, people participating in the Feed in Tariff scheme will receive payment under a “generation tariff”. This payment is not consideration for any supply and it is therefore outside the scope of VAT.

Supply of electricity to the electricity board
In addition to the Feed-In Tariff there is the additional income which you may receive from the electricity board ie; the “Export Tariff”. These payments are “consideration for supplies of electricity by people participating in the Feed in Tariff scheme to the electricity company, where they are made by taxable persons in the course of their business”. The export tariff is not outside the scope of VAT and therefore it is a supply of electricity made in the course of the furtherance of your business to the electricity supplier. It will attract standard rated VAT as it is not the supply for domestic use.

 Further…

A recent Court of Justice of the European Union (CJEU – the EU’s highest court) case has ruled in favour of the taxpayer after he argued that solar panels installed on his house constituted a business for VAT purposes. This is good news for any people who supply any energy into the grid and are paid a feed-in tariff (FiT) for doing so.

It means that anyone receiving the FiT can VAT register and reclaim (at least some) VAT incurred on the purchase and installation of solar panels plus input tax incurred on any other goods and services relating to the panels.

The supply and installation of “energy saving materials”, including solar panels, is currently subject to a reduced VAT rate of 5% in the UK. The European Commission is currently challenging this policy, arguing that the tax incentive goes beyond the scope of the law. The VAT Directive only allows Member States to apply reduced VAT rates to a limited number of goods and services, which are specified in an annex to the directive. So the cost of buying and installing solar panels may increase in the future.

It is anticipated that HMRC will need to deal with “thousands” of extra registration applications resulting in significant additional VAT repayments.

Oops! – Top Ten VAT howlers

By   6 January 2015
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I am often asked what the most frequent VAT errors made by a business are. I usually reply along the lines of “a general poor understanding of VAT, considering the tax too late or just plain missing a VAT issue”.  While this is unquestionably true, a little further thought results in this top ten list of VAT horrors:

  1. Not considering that HMRC may be wrong. There is a general assumption that HMRC know what they are doing. While this is true in most cases, the complexity and fast moving nature of the tax can often catch an inspector out. Added to this is the fact that in most cases inspectors refer to HMRC guidance (which is HMRC’s interpretation of the law) rather to the legislation itself. Reference to the legislation isn’t always straightforward either, as often EC rather than UK domestic legislation is cited to support an analysis. The moral to the story is that tax is complicated for the regulator as well, and no business should feel fearful or reticent about challenging a HMRC decision.
  2.  Missing a VAT issue altogether. A lot of errors are as a result of VAT not being considered at all. This is usually in relation to unusual or one-off transactions (particularly land and property or sales of businesses). Not recognising a VAT “triggerpoint” can result in an unexpected VAT bill, penalties and interest, plus a possible reduction of income of 20% or an added 20% in costs. Of course, one of the basic howlers is not registering at the correct time. Beware the late registration penalty, plus even more stringent penalties if HMRC consider that not registering has been done deliberately.
  3.  Not considering alternative structures. If VAT is looked at early enough, there is very often ways to avoid VAT representing a cost. Even if this is not possible, there may be ways of mitigating a VAT hit.
  4.  Assuming that all transactions with overseas customers are VAT free. There is no “one size fits all” treatment for cross border transactions. There are different rules for goods and services and a vast array of different rules for different services. The increase in trading via the internet has only added to the complexity in this area, and with new technology only likely to increase the rate of new types of supply it is crucial to consider the implications of tax; in the UK and elsewhere.
  5.  Leaving VAT planning to the last minute. VAT is time sensitive and it is not usually possible to plan retrospectively. Once an event has occurred it is normally too late to amend any transactions or structures. VAT shouldn’t wag the commercial dog, but failure to deal with it at the right time may be either a deal-breaker or a costly mistake.
  6.  Getting the option to tax wrong. Opting to tax is one area of VAT where a taxpayer has a choice. This affords the possibility of making the wrong choice, for whatever reasons. Not opting to tax when beneficial, or opting when it is detrimental can hugely impact on the profitability of a project. Not many businesses can carry the cost of, say, not being able to recover VAT on the purchase of a property, or not being able to recover input tax on a big refurbishment. Additionally, seeing expected income being reduced by 20% will usually wipe out any profit in a transaction.
  7.  Not realising a business is partly exempt. For a business, exemption is a VAT cost, not a relief. Apart from the complexity of partial exemption, a partly exempt business will not be permitted to reclaim all of the input tax it incurs and this represents an actual cost. In fact, a business which only makes exempt supplies will not be able to VAT register, so all input tax will be lost. There is a lot of planning that may be employed for partly exempt businesses and not taking advantage of this often creates additional VAT costs.
  8.  Relying on the partial exemption standard method to the business’ disadvantage. A partly exempt business has the opportunity to consider many methods to calculate irrecoverable input tax. The default method, the “standard method” often provides an unfair and costly result. I recommend that any partly exempt business obtains a review of its activities from a specialist. I have been able to save significant amounts for clients simply by agreeing an alternative partial exemption method with HMRC.
  9.  Not taking advantage of the available reliefs. There are a range of reliefs available, if one knows where to look. From Bad Debt Relief, Zero Rating (VAT nirvana!) and certain de minimis limits to charity reliefs and the Flat Rate Scheme, there are a number of easements and simplifications which could save a business money and reduce administrative and time costs.
  10.  Forgetting the impact of the Capital Goods Scheme. The range of costs covered by this scheme has been expanded recently. Broadly, VAT incurred on certain expenditure is required to be adjusted over a five or ten year period. Failure to recognise this could either result in assessments and penalties, or a position whereby input tax has been under-claimed. The CGS also “passes on” when a TOGC occurs, so extra caution is necessary in these cases.

So, you may ask: “How do I make sure that I avoid these VAT pitfalls?” – And you would be right to ask.

Of course, I would recommend that you engage a VAT specialist to help reduce the exposure to VAT costs!