VAT expert Tony Nickson outlines the pitfalls to avoid when reclaiming input VAT.
1. Reclaims for purchases made before VAT registration
It is important to ensure that the maximum amount of input VAT is reclaimed on your business expenditure. This includes input tax on expenditure incurred before you register for VAT which is often overlooked.
Be aware that there are time limits for backdating claims for VAT paid before registration. From your date of VAT registration, the time limit is:
- 4 years for goods you still have, or that were used to make other goods you still have, and
- 6 months for services.
You should also remember that:
- you can only reclaim VAT on purchases for the business now registered for VAT, and
- they must relate to your ‘business purpose’ – i.e. they must relate to VAT taxable goods or services that you supply.
2. Inputting errors
Duplication – input tax errors involving duplications are common, perhaps due to the increasing use of computers, photocopiers and phones to produce invoices. Pro-forma invoices should not be used to claim input tax.
Transposition errors – a common error, which can be genuine or careless. A single digit error could end up being very expensive, especially after HMRC penalties.
To ensure that errors are avoided, it is important that spreadsheets are set up properly and data is inputted accurately. VAT returns are only as accurate as the person inputting the data!
3. Not adjusting for unpaid expenditure
There is a requirement to add back input tax if the related expenditure remains unpaid six months after the date of the supply or the due date for payment (whichever is the later).
This is often overlooked and is one of the most common errors I found as a VAT officer. It can also add up to substantial amounts of tax owing.
4. Non-business use has been ignored
Input tax may not be claimed on expenditure which is for private or non-business purposes.
Typical examples include: costs related to domestic accommodation; sporting and leisure activities unrelated to the business; personal benefits to company directors, partners and proprietors.
5. Partly exempt – but do you realise it?
When a business has expenditure, which relates to exempt supplies, as well as taxable supplies, it becomes partly exempt and can only claim the input tax related to its taxable supplies.
Many businesses do not recognise that they are partly exempt or carry out partial exemption calculations incorrectly. We can assist with any queries relating to this.
6. No link to a taxable transaction
A basic condition of input tax deduction is that the goods or the services purchased must have a “direct and immediate link with a taxable transaction”.
For example: an item purchased for the home will not usually have any link to your business.
This is a complex area and you should seek advice if you are in any doubt.
7. Business entertainment claimed
The VAT treatment of entertainment costs cause confusion to many businesses. Generally input tax can not be claimed on business entertainment unless it is provided to employees or overseas customers.
Business entertainment includes the provision of food and drink, theatre or concert tickets, accommodation, entry to sporting events and facilities, or the use of capital assets such as yachts and aircraft for the purpose of entertaining.
Sponsorship arrangements can include elements of business entertainment and apportionment of the input tax may be required.
8. Tax reclaimed on cars
Generally, input tax can not be claimed on the purchase of cars.
Input tax can only be claimed on the purchase of a car when one of the following applies:
- it is a stock in trade car of a manufacturer or a dealer, or
- it is intended to be used primarily as a taxi, a driving instruction car or for self-drive hire, or
- it is to be used exclusively for business purposes and will not be available for anyone’s private use, which normally includes home to work journeys.
This restriction applies to purchases of new cars and of second-hand cars on which VAT has been charged.
If you lease a ‘qualifying car’ (i.e. it meets one of the above conditions) for business purposes you will normally be unable to recover 50% of the VAT charged. The 50% block is to cover the private use of the car. You can reclaim the remaining 50% of the VAT charged, subject to the normal rules.
9. Errors relating to the Flat Rate Scheme
A business using the Flat Rate Scheme (FRS) will pay a fixed rate of VAT to HMRC and is generally not able to reclaim input tax on purchases. However input tax may be claimed on individual purchases of capital expenditure goods with a VAT inclusive cost of £2,000 or more.
You get a 1% discount if you use the FRS and you’re in your first year as a VAT registered business. But please remember, the 1% discount is for the first year after registration (not the first year of using the FRS) and is only available for this period.
10. Limited cost trader pays more VAT than necessary
A “limited cost trader” is a business that has to use a special percentage – 16.5% – for the VAT flat rate scheme. The business must review the rules every quarter to determine whether it meets the definition of a limited cost trader.
It is important the rules are reviewed every quarter as you can move from a limited cost rate of 16.5% in one period, to your relevant sector rate in another (if your costs fluctuate above and below 2%).
If you are a limited cost trader you may pay more VAT than you would do on standard accounting – so you should regularly check to make sure the Flat Rate Scheme is still right for your business. If you are voluntarily registered for VAT, it may be that you can de-register from VAT.
If you have any concerns relating to your business’ VAT claims, please get in touch with Tony Nickson or your usual Hawsons contact.
Alternatively, we offer all new clients a free initial meeting to have a discussion about their own personal circumstances – find out more or book your free initial meeting here. We have offices in Sheffield, Doncaster and Northampton.