How to manage VAT? With the UK experiencing the highest rates of inflation and interest for over a decade, now more than ever is the time to look after the pennies. Whilst VAT can be a complex subject, there are a number of relatively quick or simple measures that can be applied. There are also a few traps to be aware of to help a business manage its VAT.
Simon Anslow, VAT Partner, is here with ten top tips on how to manage VAT to help your business improve efficiency and avoid any nasty surprises.
1. Tax points – 14 day rule
Regulations allow a supplier to issue a VAT invoice up to 14 days after the basic tax point (supply of the goods or performance of the services). This delays the date when VAT becomes accountable. If utilised at the end of a VAT period, this can potentially defer payment of that VAT for up to three months.
2. How to manage VAT using request for payments (RFP)
Let’s stick with the theme of when VAT becomes due, aka ‘tax points’. Where services are performed over a period of time and allow for periodic payments to be made, it is possible to issue a document often referred to as a ‘Request for Payment’. This falls short of a full VAT invoice. It allows the tax point to be deferred until such time as payment is received, at which point the VAT invoice is issued. This potentially enables the accounting for and payment of the VAT until a later VAT period. Be aware this will potentially increase (and require tighter) administration.
3. VAT bad debt relief (BDR)
Now let’s look at the scenario where invoices go unpaid by your customers six months or more after payment was due and you have already accounted for the VAT due on the sale to HMRC. Providing they are posted to a VAT bad debt account, and follow the prescribed rules, the VAT can be reclaimed. Regular review of outstanding debtors and updating of the VAT bad debt account will enable efficient VAT management. Remember, where that debt is subsequently settled, the VAT claimed will, of course, need to be accounted for.
4. Aged creditors
The ‘sting in the tail’ and the flip side of bad debt relief is that careful monitoring of creditors is also necessary. There is a requirement to repay any VAT previously claimed on a creditor that extends beyond six months from the date payment became due. As with BDR, once that debt is settled, the VAT ‘clawed back’ can again be reclaimed.
5. Group registration
Where two or more corporates are under common control, there is a potential for them to group together under a single VAT registration. The rules now extend in certain circumstances to partnerships and individuals. This then allows any transactions between those VAT group members to be ignored for VAT purposes i.e. no VAT is chargeable. This is subject to certain anti-avoidance and specified circumstances.
This can have a significant VAT cash-flow benefit and be particularly advantageous where a member would not otherwise have been able to make full or any recovery of VAT charged on those transactions.
6. How to manage VAT on mileage claims
Let’s move on to reimbursement of motor costs when made on a business mileage basis. HMRC allow a proportion of that ‘pence per mile’ (ppm) to be treated as fuel and for VAT to be reclaimed thereon. For ‘company cars’ (usually a low, reduced fuel-only ppm), this is 100%. For ‘own’ cars HMRC recommend (but are not prescriptive) the AA fuel rates. However, they will often accept a simple approach which is normally a third of the standard ppm. Taken on an isolated basis, 1/6th of 1/3rd of (say) 45ppm (~2.5ppm) may not sound very much. But the cumulative rewards can be quite surprising, beneficial and especially welcome in a downturn.
7. Cars versus vans
Except in very specific circumstances, such as car dealers, car hire firms, or taxis, VAT is not recoverable on the purchase of a car. Recovery is also restricted to a maximum of 50% of the VAT incurred on operating lease or contract hire arrangements.
VAT is ordinarily allowed in full* on the purchase and leasing of a commercial vehicle. Double-cab pick-ups and many more styles with a payload of more than 1000kg are classified as commercials; maybe it’s time to trade in that sports car for a family pick-up!
8. How to manage VAT on rental property
Considering leasing some of that surplus space to raise some additional income? Letting of commercial property or land is ordinarily, in the first instance, exempt with no VAT chargeable. However, this may cause a potential detrimental impact on the ability to reclaim VAT on related property costs and overheads. Furthermore, if the property has had significant costs related to its purchase, alteration, fit out or refurbishment, and these cost more than £250,000 or more + VAT in the past 10 years, you may have to repay previously reclaimed VAT. However, there are ways to mitigate this.
9. Option to tax (OTT) dis-application
Where exempt supplies of a commercial property are made, it is usually possible to choose to charge VAT – aka “opt to tax” – to enable or protect VAT recovery. This is useful at the time and for the duration. But it can be a burden when trying to sell, grant or dispose of that interest. For example due to inability by the buyer to reclaim the VAT charged, cash-flow, additional SDLT. However, it is possible to revoke the option to tax after 20 years have passed. Or it can be revoked during a 6 month ‘cooling-off’ period providing no input tax has been claimed or output tax charge.
Charities that buy or lease a property to use for a ’relevant charitable purpose’, but not as an office, are able to issue a certificate to revoke the vendor / landlord’s option to tax. Whilst that may be good for the charity, it may mean that the landlord / vendor is faced with VAT that can no longer be recovered. Or they may have to make a VAT repayment under the Capital Goods Scheme.
10. How to manage VAT via reverse charge
It may appear good news receiving services VAT-free from non-UK suppliers. However, if VAT would have been chargeable in the UK, the recipient will need to account for VAT on that service as if they had been charged in the UK. The VAT is only recoverable by the recipient as for any other expenditure. Further, where the recipient is not VAT registered, the value of such services received contribute towards the VAT registration threshold.
…and as this is VAT, you do get that bit extra:
Flat rate scheme
Businesses with a turnover of less than £150k ex-VAT can opt to use this simple scheme. Determined by business category, there is a flat rate VAT % applied to the value of VAT inclusive sales, no VAT recoverable on expenditure (excluding certain capital purchases) and relatively simple VAT accounting. This works well for businesses primarily making standard rated supplies with relatively low VAT-able costs (except those in the Limited Cost Trader bracket).
Want to know more? Let’s talk on [email protected].