Energy saving: Insulation, solar panels, wind turbines, wood-fuelled boilers and air-source heat pumps are subject to a reduced rate of VAT at 5%, but the installation of secondary or double glazing is at the standard rate of 20%.
Category Archives: VAT Basics
Should I form a VAT Group? Pros and Cons
This is a very concise summary of matters that should be considered when deciding to form or disband a VAT. Grouping is optional although HMRC have powers to refuse an application in any case where it is necessary for the protection of the revenue.
What is a VAT group?
VAT grouping is a facilitation measure by which two or more entities can be treated as a single taxable person (a single VAT registration) for VAT purposes. The measure was once restricted to “Bodies Corporate” which includes; companies of all types and limited liability partnerships. However, from 1 November 2019, grouping is additionally available for all entities, including; partnerships, sole traders and Trusts in certain cases.
It is important to recognise the difference between a corporate group and a VAT group – these are two different things and it should not be assumed that a corporate group is automatically a VAT group.
It is worth remembering that it is possible to VAT group where no taxable supplies are made outside the group.
Pros
- only one VAT return per quarter – less administration
- the representative member accounts for any tax due on supplies made by the group to third parties outside the group. This is particularly helpful if accounting is centralised
- no VAT on supplies between VAT group members. No need to invoice etc or recognise supplies on VAT returns
- usually improves the partial exemption position if exempt supplies are made between group companies
- may improve input tax recovery if taxable supplies are made to a partly exempt group company
- if assets are hived up or down into a group company before a company sale to a non-grouped third party, the VAT consequences of the intra-group movement may be ignored
- may provide useful planning opportunities/convenience at a later date
- sales invoices issued, or purchase invoices received, in the wrong company name would not require time-consuming amendment
- there may be cashflow benefits in respect of intra-group charges
- reduced chance of penalties on intra-group charges
Cons
- all members of the group are jointly and severally liable for any VAT due
- former VAT group members are also liable for any VAT debts due during the period of VAT group membership
- only one partial exemption de-minimis limit for group – which decreases the ability to fully recover input tax
- obtaining all relevant data to complete one return may take time thus possibly missing filing deadlines
- a new VAT number is issued (previous ones are cancelled – which may lead to administration etc issues)
- the representative member needs all of the necessary information to submit a VAT return for the group by the due date
- via anti-avoidance provisions, assessments can be raised on the representative member relating to earlier periods when it was not the representative member and even when it was not a member of the group at that time
- the limit for voluntary disclosures of errors on past returns applies to the group as a whole (rather than each company having its own limit)
- the payments on account (POA) limits apply to the group as a whole. This applies to a business whose VAT liability is more than £2 million pa. This adversely affects a business’s cashflow
- the cash accounting limit of £1,350,000 applies to the group as a whole (rather than each company having its own limit)
- Transfers of Going Concerns (TOGCs) acquired by a partly exempt VAT group may result in an irrecoverable VAT charge as a result of a deemed self-supply
- an option to tax made by a VAT group member is binding on all present and future members of the VAT group. This is so even after a company has left the VAT group
We strongly recommend that professional advice is taken when a business is either considering forming a VAT group, or when thought is being given to disbanding one. Making the wrong decision could be very expensive indeed. Specific matters that dictate VAT advice are when:
- property is involved
- inter-company charges are made
- TOGCs are involved
- costs in respect of restructuring are incurred (a current hot potato in the courts)
- there is an international aspect to a group
- a reverse charge applies
- a company has been involved in the penalty regime
- companies become insolvent
- a VAT group is subject to POA
- a company, or the VAT group, makes exempt supplies.
We are always happy to advise when required.
VAT: Private schools guidance updated
HMRC has updated its guidance on charging and reclaiming VAT on goods and services related to private school fees.
Since 1 January 2025, all education services and vocational training provided by private schools in the UK for a charge have been subject to standard rated VAT.
The guidance explains how some payments and situations relating to education are treated for VAT. It covers how to check if VAT is due on payments linked to private school fees and what VAT can be reclaimed.
Updates
The example of parents contracting and paying therapists directly and the example of a school supplying education and therapy under separate fees have been updated to add clarity. Also, information on the VAT implications for fee-paying sixth forms and further education providers has been updated.
Enrolling VAT into the Business Tax Account
HMRC says that the measure is necessary to prevent fraud.
VAT – Care with input tax claims
You have a purchase invoice showing VAT. You are VAT registered, and you will use the goods or services purchased for your business… can you claim it?
Assuming a business is not partly exempt or not subject to a restriction of recovery of input tax due to non-business activities (and the claim is not for a motor car or business entertainment) the answer is usually yes.
However, HMRC is now, more than ever before, concerned with irregular, dishonest and inaccurate claims. It is an unfortunate fact that some people see making fraudulent claims as an “easy” way to illegally obtain money and, as is often the case, honest taxpayers are affected as a result of the (understandable) concerns of the authorities. Missing Trader Intra-Community (MTIC) or “carousel” fraud has received a lot of publicity over recent years with an estimate of £Billions of Treasury money being obtained by fraudsters. While this has been generally addressed, HMRC consider that there is still significant leakage of VAT as a consequence of dishonest claims. HMRC’s interest also extends to “innocent errors” which result in input tax being overclaimed.
In order to avoid unwanted attention from HMRC, what should a business be watching for when claiming credit for input tax? Broadly, I would counsel making “reasonable enquiries”. This means making basic checks in order to demonstrate to HMRC that a business has taken care to ensure that a claim is appropriate. This is more important in some transactions than others and most regular and straightforward transactions will not be in issue. Here are some pointers that I feel are important to a business:
Was there a supply?
This seems an obvious question, but even if a business holds apparently authentic documentation; if no supply was made, no claim is possible. Perhaps different parts of a business deal with checking the receipt of goods or services and processing documents. Perhaps a business has been the subject of fraud by a supplier. Perhaps the supply was to an individual rather than to the business. Perhaps a transaction was aborted after the documentation was issued. There may be many reasons for a supply not being made, especially when a third party is involved. For example, Co A contracts with Co B to supply goods directly to Co C. Invoices are issued by Co B to Co A and by Co A to Co C. It may not be clear to Co A whether the goods have been delivered, or it may be difficult to check. A lot of fraud depends on “correct” paperwork existing without any goods or services changing hands.
Is the documentation correct?
The VAT regulations set out a long list of details that a VAT invoice must show. Full details on invoicing here If any one of these required items is missing HMRC will disallow a claim. Beware of “suspicious” looking documents including manually amended invoices, unconvincing quality, unexpected names or addresses of a supplier, lack of narrative, “copied” logos or “clip-art” additions etc. One of the details required is obviously the VAT number of the supplier. VAT numbers can be checked for validity here
Additionally, imports of goods require different documentation to support a claim and this is a more complex procedure (which extends to checking whether supplies of goods have been made and physical access to them). A lot of fraud includes a cross border element so extra care should be taken in checking the validity of both the import and the documentation.
Ultimately, it is easy to create a convincing invoice and HMRC is aware of this.
Timing
It is important to claim input tax in the correct period. Even if a claim is a day out it may be disallowed and penalties levied. details of time of supply here
Is there VAT on a supply?
If a supplier charges VAT when they shouldn’t, eg; if a supply is zero rated or exempt or subject to the Transfer of A Going Concern rules (TOGC), it is not possible to reclaim this VAT even if the recipient holds an apparently “valid” invoice. HMRC will disallow such a claim and will look to levy penalties and interest. When in doubt; challenge the supplier’s treatment.
Place of supply
Only UK VAT may be claimed on a UK return, so it is important to check whether UK VAT is actually applicable to a supply. The place of supply (POS) rules are notoriously complex, especially for services, if UK VAT is shown on an invoice incorrectly, and is claimed by the recipient, HMRC will disallow the claim and look to levy a penalty, so enquiries should be made if there is any uncertainty. VAT incurred overseas can, in most cases be recovered, but this is via a different mechanism to a UK VAT return. Details on claiming VAT in other EC Member States here. (As with many things, this may change after Brexit).
One-off, unusual or new transactions
This is the time when most care should be taken, especially if the transaction is of high value. Perhaps it is a new supplier, or perhaps it is a property transaction – if a purchase is out of the ordinary for a business it creates additional exposure to mis-claiming VAT.
To whom is the supply made?
It is only the recipient of goods or services who may make a claim; regardless of; who pays or who invoices are issued to. Care is required with groups of companies and multiple VAT registrations eg; an individual may be registered as a sole proprietor as well as a part of a partnership or director of a limited company, As an illustration, a common error is in a situation where a report is provided to a bank (for example for financing requirements) and the business pays the reporting third party. Although it may be argued that the business pays for the report, and obtains a business benefit from it, the supply is to the bank in contractual terms and the business cannot recover the VAT on the services, in fact, in these circumstances, nobody is able to recover the VAT. Other areas of uncertainty are; restructuring, refinancing or acquisitions, especially where significant professional costs are involved.
e-invoicing
There are additional rules for electronically issued invoices. Details here
A business may issue invoices electronically where the authenticity of the origin, integrity of invoice data, and legibility of invoice content can all be ensured, and the customer agrees to receive invoices electronically.
- ‘Authenticity of the origin’ means the assurance of the identity of the supplier or issuer of the invoice
- ‘Integrity of content’ means that the invoice content has not been altered
- ‘Legibility’ of an invoice means that the invoice can be easily read.
A business is free to choose a method of ensuring authenticity, integrity, and legibility which suits its method of operation. e-invoicing provides additional opportunities for fraudsters, so a business needs to ensure that its processes are bulletproof.
HMRC’s approach
If a claim is significant, or unusual for the business’ trading pattern, it is likely that HMRC will carry out a “pre-credibility” inspection where they check to see if the claim is valid before they release the money. Another regular check is for HMRC to establish whether the supplier has declared the relevant output tax on the other side of the transaction (a so-called “reference”). Not unsurprisingly, they are not keen on making a repayment if, for whatever reason, the supplier has not paid over the output tax.
What should a business do?
In summary, it is prudent for a business to “protect itself” and raise queries if there is any doubt at all over making a claim. It also needs a robust procedure for processing invoices. If enquiries have been made, ensure that these are properly documented for inspection by HMRC as this is evidence which may be used to mitigate any potential penalties, even if a claim is an honest mistake. A review of procedures often flushes out errors and can lead to increased claims being made.
As always, we are happy to assist.
The ABC of VAT – property
Anyone who has had even the slightest brush with VAT will know that it is a very complex tax. Now, multiply that complexity by the intricacy and occasionally arcane nature of property law and one may see that the outcome will be less than straightforward. I have produced a general guide and an article on residential property VAT Triggerpoints
I hope the following glossary will help with steering through some of the difficulties.
- Annex– a building which is joined to or is next to a larger main building usually an extension or addition to a building
- Assign – to transfer the right or interest in a property from one party to another
- Break clause – a clause allowing either landlord or tenant to give written notice after a particular date or period of the tenancy in order to end the tenancy
- Beneficial owner – party deemed to make a supply of property rather than the legal owner
- Blocked input tax – VAT which a developer is unable to recover when constructing a new dwelling. Typically, expenditure on good such as; carpets, fitted furniture, and gas and electrical appliances
- Building materials– goods ordinarily incorporated into a property which attracts similar VAT treatment to the construction services.
- Capital Goods Scheme(CGS) – a method of calculating the recovery amount of input tax incurred on property over a ten-year period, Details of the CGS here
- Certificate – a document issued to a supplier in order to obtain certain zero-rated or reduced-rated building work
- Change of number of dwellings– usually a conversion from commercial to residential, or a single house into flats (or flats into a single house) at 5% VAT
- Consideration– a thing done or given in exchange for something else = a supply. Usually quantified in money, but in some cases non-monetary consideration
- Construction of new dwellings – a zero rated supply
- Contract – legal document detailing the agreement of terms between the vendor and buyer
- Contractor – entity responsible for building works
- Conversion–work on a non-residential building which results in a property designed as a dwelling(s) being created
- Covenants – rules governing the property in its title deeds or lease. May impact the definition of dwellings
- Curtilage– either a garden, or an area surrounding a building which is deemed to be part of the property
- Designed as a dwelling– a property initially designed for residential use, regardless of any subsequent alternative use
- Dilapidations – items that have been damaged during a tenancy for which the tenant is responsible for the cost of repair or replacement. Usually VAT free
- DIY Housebuilders’ Scheme – a scheme which ‘self-builders’ to recover VAT on a new build dwelling or conversion. Details here
- Domestic Reverse Charge – a self-supply charge details here
- Dwelling– a building deemed to be residential
- Empty house – if, in the ten years before work on a dwelling starts, it has not been lived in, the work may be subject to 5% rather than 20% VAT
- Exempt– a supply that is VAT free. It usually results in attributable input tax falling to be irrecoverable
- Facade– a wall (or two walls on a corner plot) which may be retained without affecting the zero rating of a new dwelling construction
- Grant– a supply of an interest in land
- Holiday home – the sale or long lease of a holiday home cannot be zero-rated even if it is designed as a dwelling
- Housing Association – a non-profit organisation which rents residential property to people on low incomes or with particular needs
- In the course of construction– meaningful works that have occurred in relation to the construction of a building (but prior to its completion)
- Incorporated goods – goods sold with a new dwelling which are zero rated and to which the input tax block does not apply. See white goods
- Input tax– VAT incurred on expenditure associated with property
- Interest in, or right over, land– the right to access to and use of, land. Usually via ownership or lease
- Lease – legal document governing the occupation by the tenant of a premises for a specific length of time
- Licence to occupy– a permission to use land that does not amount to a tenancy
- Live-work units – a property that combines a dwelling and commercial or industrial working space. Usually subject to apportionment
- Major interest–a supply of a freehold interest or a lease exceeding 21 years
- Multiple occupancy dwelling – a dwelling which is designed for occupation by persons not forming a single household
- New building–a commercial building less than three years old the sale of which is mandatorily standard
- Non-residential– a commercial building which is not used as a dwelling
- Open market value – likely sale price with a willing seller and buyer, with a reasonable period of marketing and no special factors affecting the property
- Option to tax (OTT) – act of changing the exempt sale or letting of a commercial into a taxable supply. The purpose is to either; recover input tax or avoid input tax being charged. Details here
- OTT disapplication– the legal removal of a vendor’s option to tax
- OTT not applicable – the OTT does not apply to residential buildings (so VAT can never apply to dwellings)
- OTT revocation– the ability to revoke an option to tax after six months or twenty years
- Partial exemption– a calculation to attribute input tax to exempt and taxable. Generally, VAT incurred in respect of exempt supplies is irrecoverable
- Person constructing – a developer, contractor or sub-contractor who constructs a building
- Premium – upfront payment for a supply of property
- Relevant Charitable Purpose (RCP)–the use by a charity for non-business purposes or for use as a village hall or similar
- Relevant Residential Purpose (RRP)– dwelling used for certain defined residential purposes, eg; children’s home, a hospice or student accommodation
- Reverse surrender– a tenant surrenders an onerous lease to the landlord and makes a payment to surrender
- Share of freehold – where the freehold of the property is owned by a company and the shareholders are the owners of the property
- Single household dwelling– a building designed for occupation by a single household
- Snagging – the correction of building faults. Usually follows the VAT liability of the original work
- Stamp Duty Land Tax (SDLT) – tax paid by a purchaser of a property. SDLT is increased if the sale of a commercial property is the subject of an option to tax
- Substantial reconstruction– certain significant works to a listed building
- Surrender– a tenant surrenders the lease to the landlord in return for payment
- Taxable supply– a supply subject to VAT at the standard, reduced or zero-rate
- Use as a dwelling – a building which was designed or adapted for use as someone’s home and is so used
- Vendor – entity selling a property
- Transfer of a Going Concern (TOGC) – the VAT free sale of the assets of a business as a going concern. This may include a tenanted property
- Zero-rated– a taxable supply subject to VAT at a rate of 0%
We strongly recommend that advice is obtained if any property transaction is being undertaken.
Details of our land and property services may be found here.
VAT Grouping: Protection of the Revenue
HMRC has updated VAT Notice 700/2 – Group and divisional registration.
The salient amendments are to the references to ‘protection of the revenue’ and ‘Revenue loss’.
VAT grouping is a facilitation measure by which two or more entities can be treated as a single taxable person (a single VAT registration) for VAT purposes. The measure was once restricted to “Bodies Corporate” which includes; companies of all types and limited liability partnerships. However, from 1 November 2019, grouping is additionally available for all entities, including; partnerships, sole traders and Trusts in certain cases.
HMRC has the vires to refuse an application for a VAT group, or remove a member if HMRC consider that it may lead to a VAT loss.
The Change
“The definition of ‘protection of the revenue’
Where this is considered necessary for the protection of the revenue, the VAT grouping legislation gives HMRC the power to:
- prevent a person joining a VAT group
- remove an existing member from a VAT group
We usually will not use our protection of the revenue powers if the revenue loss follows from the normal operation of grouping. If we feel that the revenue loss does not follow the normal operation of grouping, then we would consider using our protection of the revenue powers, such as:
- where we identify enhanced risks to the collection of revenue
- the use of VAT avoidance and distortion in the liability of the group’s supplies
In this context, ‘revenue loss’ means the VAT that is not charged when one company in a group sells to another company in the same group. This usually happens when one or more companies in the VAT group cannot reclaim all the VAT they pay because they make supplies that are exempt from VAT.
We will use our revenue protection powers if it looks like the main reason for VAT grouping someone is to ignore supplies from that company’s overseas branches to other members of the VAT group.
This applies whether that person is established in the UK or has a UK fixed establishment”.
VAT: Top 10 Tips for small businesses and start-ups
- 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
More here
- Even non-registered businesses can save VAT
- Look to use non-VAT registered suppliers, or non-UK suppliers (however, this may count towards your registration turnover)
- If you are purchasing or leasing commercial property, consider looking for non-opted property or raise the issue of your inability to recover VAT in negotiations on the rent
- Take advantage of all zero and reduced rates of VAT reliefs available
- Challenge suppliers if you consider that a higher rate of VAT has been charged than necessary
- Consider using the appropriate simplification scheme
- Flat Rate Scheme (1% discount in first year of registration)
- Cash Accounting (helps avoid VAT issues on bad debts)
- Annual Accounting (can generate real, cash flow and/or administrative savings)
- Margin schemes for second-hand goods
- Make sure you recover all pre-registration and/or pre-incorporation VAT
VAT incurred on goods on hand (purchased four years ago or less) and services up to six months before VAT registration is normally recoverable.
- Are your VAT liabilities correct?
Many businesses have complex VAT liabilities (eg; financial services, charities, food outlets, insurance brokers, cross border suppliers of goods or services, health, welfare and education service providers, and any business involved in land and property). A review of the VAT treatment may avoid assessments and penalties and may also identify VAT overcharges made which could give rise to reclaims. Additionally, these types of business are often restricted on what input tax they can reclaim. Check business/non-business apportionment and partial exemption restrictions.
More on charities here
- Have you incurred VAT elsewhere outside the UK?
You may be able to claim this from overseas tax authorities. Details here
- Do you recover VAT on road fuel or other motoring costs?
Options for VAT on fuel: keep detailed records of business use or use road fuel scale charges (based on CO2 emissions)
If you need a car; consider leasing rather than buying. 50% of VAT on lease charge is potentially recoverable, plus 100% of maintenance if split out on invoice. VAT on the purchase of a car is usually wholly irrecoverable.
More here
- Remember: VAT on business entertainment is usually not recoverable but VAT on subsistence and staff entertainment is.
- Pay proper attention to VAT
- keep up to date records
- submit VAT returns and pay VAT due on time (will avoid interest, potential penalties and hassle from the VAT man)
- claim Bad Debt Relief (BDR) on any bad debts over six months old
- contact HMRC as soon as possible if there are VAT payment problems or if there are difficulties submitting returns on time
- ensure that the business is paying the right amount of tax at the right time – too little (or too late) may give rise to penalties and interest – too much is just throwing money away
- check the VAT treatment of ALL property transactions
More here
- Challenge any unhelpful rulings or assessments made by HMRC
HMRC is not always right. There is usually more than one interpretation of a position and professional help more often than not can result in a ruling being changed, or the removal or mitigation of an assessment and/or penalty.
We can assist with any aspect of VAT. You don’t need to be a tax expert; you just need to know one… We look after your VAT so you can look after your business.
VAT: New guidance on using postponed VAT accounting
HMRC has published (on 28 November 2025) a collection of new guidance on postponed VAT accounting (PVA).
The guidance covers what a business needs to do if it is using PVA to account for import VAT on its VAT returns.
The publication brings together all PVA guidance, giving detailed information about:
Charities and VAT – A Guide
This is a common myth, and while charities and Not-For-Profit entities (NFPs) do enjoy some VAT reliefs, they are also liable for a number of VAT charges.
Charities have a very hard time of it in terms of VAT, since not only do they have to contend with complex legislation and accounting (which other businesses, no matter how large or complicated do not) but VAT represents a real and significant cost.
By their very nature, charities carry out “non-business” activities which means that VAT is not recoverable on the expenses of carrying out these activities. Additionally, many charities are involved in exempt supplies, eg; fundraising events, property letting, and certain welfare and educational services, which also means a restriction on the ability to recover VAT on attributable costs.
These two elements are distinct and require separate calculations which are often very convoluted. The result of this is that charities bear an unfair burden of VAT, especially so since the sector carries out important work in respect of; health and welfare, poverty, education and housing etc. Although there are some specific reliefs available to charities, these are very limited and do not, by any means, compensate for the overall VAT cost charities bear.
Another issue is legal uncertainty over what constitutes “business income” for charities, especially the VAT status of grants. It is worth bearing in mind here the helpful comment in the EC case of Tolsma translated as: “…the question is whether services carried on by [a person] were carried on for the payment or simply with the payment”.
Many charities depend on donations which, due to the economic climate have fallen in value at a time when there is a greater demand on charities from struggling individuals and organisations.
What can be done?
- ensure any applicable reliefs are taken advantage of
- if significant expenditure is planned, ensure that professional advice is sought to mitigate any tax loss
- review the VAT position to ensure that the most appropriate partial exemption methods and non-business apportionment is in place
- review any land and property transactions. These are high value and some reliefs are available. Additionally it is usually possible to carry out planning to improve the VAT position of a property owning charity
- review VAT procedures to ensure that VAT is declared correctly. Penalties for even innocent errors have increased recently and are incredibly swingeing
- consider a VAT “healthcheck” which often identifies problems and planning opportunities
We have considerable expertise in the NFP sector and would be pleased to discuss any areas of concern, or advise on ways of reducing the impact of VAT on a charity.
More detail on VAT and Charities for guidance
Business activities
It is important not to confuse the term ‘trading’ as frequently used by a charity to describe its non-charitable commercial fund-raising activities (usually carried out by a trading subsidiary) with ‘business’ as used for VAT purposes. Although trading activities will invariably be business activities, ‘business’ for VAT purposes can have a much wider application and include some or all of the charity’s primary or charitable activities.
Registration and basic principles
Any business (including a charity and NFP or its trading subsidiary) which makes taxable supplies in excess of the VAT registration threshold must register for VAT. Taxable supplies are business transactions that are liable to VAT at the standard rate, reduced rate or zero rate.
If a charity’s income from taxable supplies is below the VAT registration threshold it can voluntarily register for VAT but a charity that makes no taxable supplies (either because it has no business activities or because its supplies or income are exempt from VAT) cannot register.
Charging VAT
Where a VAT-registered charity makes supplies of goods and services in the course of its business activities, the VAT liability of those supplies is, in general, determined in the normal way as for any other business. Even if VAT-registered, a charity should not charge VAT on any non-business supplies or income.
Reclaiming VAT
This is usually a two stage process (a combined calculation is possible but it must have written approval from HMRC – Notice 706 para 7) . The first stage in determining the amount of VAT which a VAT-registered charity can reclaim is to eliminate all the VAT incurred that relates to its non-business activities. It cannot reclaim any VAT it is charged on purchases that directly relate to non-business activities. It will also not be able to reclaim a proportion of the VAT on its general expenses (eg; telephone, IT and electricity) that relate to those non-business activities.
Once this has been done, the remaining VAT relating to the charity’s business activities is input tax.
The second stage: It can reclaim all the input tax it has been charged on purchases which directly relate to standard-rated, reduced-rated or zero-rated goods or services it supplies.
It cannot reclaim any of the input tax it has been charged on purchases that relate directly to exempt supplies.
It also cannot claim a proportion of input tax on general expenses (after adjustment for non-business activities) that relates to exempt activities unless this amount, together with the input tax relating directly to exempt supplies, is below the minimis limit.
Business and non-business activities
An organisation such as a charity that is run on a non-profit-making basis may still be regarded as carrying on a business activity for VAT purposes. This is unaffected by the fact that the activity is performed for the benefit of the community. It is therefore important for a charity to determine whether any particular transactions are ‘business’ or ‘non-business’ activities. This applies both when considering registration (if there is no business activity a charity cannot be registered and therefore cannot recover any input tax) and after registration. If registered, a charity must account for VAT on taxable supplies it makes by way of business. Income from any non-business activities is not subject to VAT and affects the amount of VAT reclaimable as input tax.
‘Business’ has a wide meaning for VAT purposes based upon Directive 2006/112/EC (which uses the term ‘economic activity’ rather than ‘business’), UK VAT legislation and decisions by the Courts and VAT Tribunals. An activity may still be business if the amount charged does no more than cover the cost to the charity of making the supply or where the charge made is less than cost. If the charity makes no charge at all the activity is unlikely to be considered business.
An area of particular difficulty for charities when considering whether their activities are in the course of business is receipt of grant funding.
The VAT a business incurs on running costs is called input tax. For most businesses this is reclaimed on VAT returns from HMRC if it relates to standard rated or zero rated sales that that business makes. However, a business which makes exempt sales may not be in a position to recover all of the input tax which it incurred. A business in this position is called partly exempt. Generally, any input tax which directly relates to exempt supplies is irrecoverable. In addition, an element of that business’ general overheads are deemed to be in part attributable to exempt supplies and a calculation must be performed to establish the element which falls to be irrecoverable.
Input tax which falls within the overheads category must be apportioned according to a so called; partial exemption method. The “Standard Method” requires a comparison between the value of taxable and exempt supplies made by the business. The calculation is; the percentage of taxable supplies of all supplies multiplied by the input tax to be apportioned which gives the element of VAT input tax which may be recovered. Other partial exemption methods (so called Special Methods) are available by specific agreement with HMRC. There is also a de minimis relief.
My flowchart may be of use: partial exemption flowchart
Summary
One may see that this is a complex area for charities and not for profit entities to deal with. Certainly a review is almost always beneficial, as are discussions regarding partial exemption methods.
Please click here for more information on our services for charities.