Value Added Tax

If using the VAT Flat Rate scheme, businesses pay VAT as a fixed percentage of their VAT inclusive turnover. The actual percentage used depends on the type of business. The scheme has been designed to simplify the way a business accounts for VAT and reduce the administration costs of complying with the VAT legislation.

The scheme is open to businesses that expect their annual taxable turnover in the next 12 months to be no more than £150,000, excluding VAT. The annual taxable turnover limit is the total of everything that a business sells during the year. It includes standard, reduced rate or zero rate sales and other supplies. It excludes the actual VAT charged, VAT exempt sales and sales of any capital assets.

As part of an annual review, it is recommended that businesses using the scheme continue to qualify to use the scheme. Businesses that have joined the scheme can continue using the scheme provided their total business income does not exceed £230,000 in a 12-month period. There are also special rules where increased turnover is temporary.

A limited cost trader test was introduced in April 2017. Businesses that meet the definition of a 'limited cost trader' are required to use a fixed rate of 16.5% for the scheme. Businesses defined as limited cost traders may find it more beneficial to leave the scheme and account for VAT using traditional VAT accounting methods.

There is also a first-year discount for businesses in their first year of VAT registration of 1%.

There are special rules to ensure that goods sent from abroad are taxed appropriately and to ensure that UK businesses supplying goods in the UK – for example by having to compete with VAT free imports – are not disadvantaged. This includes goods that are new or used and purchased online, purchased abroad and shipped to the UK and goods received as gifts.

This means that to receive your goods you may have to pay VAT, Customs Duty or Excise Duty if they were sent to:

• Great Britain (England, Wales and Scotland) from outside the UK.
• Northern Ireland from countries outside the UK and the European Union (EU).

VAT is charged on all goods (except for gifts worth £39 or less) sent from:

• outside the UK to Great Britain; and
• outside the UK and the EU to Northern Ireland.

Online marketplaces involved in facilitating the sale of goods are usually responsible for collecting and accounting for the VAT. If the VAT has not been collected, you will have to pay VAT to the delivery company either before the goods are delivered or when you collect them. If you have to pay VAT to the delivery company, it is charged on the total package value which includes the value of the goods, postage, packing, insurance and any duty owed.

There are usually no Customs Duty payable on non-excise goods worth £135 or less. There are Customs Duty payable above this level and on excise goods of any value.

HMRC’s VAT Notice 709/3 entitled 'Hotels and holiday accommodation' explains how supplies by hotels and similar establishments such as motels, guesthouses and B&Bs should be treated for VAT purposes. In addition, the notice covers the VAT treatment of holiday accommodation such as caravans and camping facilities.

Holiday accommodation includes, but is not restricted to:

• any house
• flat
• chalet
• villa
• beach hut
• tent
• caravan
• houseboat

Accommodation advertised or held out as suitable for holiday or leisure use is always treated as holiday accommodation. There may be a restriction under which occupation of the property throughout the year is not permitted, but this will not always be the case.

If you supply holiday accommodation, you may need to account for VAT at the standard rate on any charges that you make regardless of the length of occupation or description of the charges. There are a number of exceptions to this including the sale of holiday accommodation and for off-season lettings of more than 28 days.

The taxable turnover threshold, which determines whether businesses should be registered for VAT, is currently £85,000. The taxable turnover threshold that determines whether businesses can apply for deregistration is £83,000.

Businesses are required to register for VAT if they meet either of the following two conditions:

1. At the end of any month, the value of the taxable supplies made in the past 12 months or less has exceeded £85,000; or
2. At any time, there are reasonable grounds for believing that the value of taxable supplies to be made in the next 30 days alone will exceed £85,000.

The registration threshold for relevant acquisitions from other EU Member States into Northern Ireland is also £85,000.

Businesses with no physical presence in the UK may also have a liability to be VAT registered in the UK if they supply any goods or services to the UK (or expect to in the next 30 days).

The VAT Capital Goods Scheme (CGS) is a means of spreading the initial VAT recovery in respect of certain assets over either 5 or 10 years. The scheme seeks to agree a fair and reasonable attribution of VAT to taxable supplies and non-taxable supplies relating to the use of an asset over its lifetime.

The adjustment period for land and buildings is 10 years and for other CGS assets, 5 years. This adjustment period also considers any non-business use of the asset. The CGS is intended primarily for partly exempt businesses. However, businesses can change direction over the adjustment period and be subject to making CGS adjustments some years after an asset was purchased.

The CGS currently applies to:

• Land and building (including extensions, alterations and refurbishments) with a cost (net of VAT) of £250k or more.
• Computers, or computer equipment, with a cost (net of VAT) or £50k or more.
• Ships and boats with a cost (net of VAT) of £50k or more.
• Aircraft with a cost (net of VAT) of £50k or more

The scheme does not apply if:

• the assets are acquired solely for resale;
• you spend money on assets which are solely for resale; or
• assets are acquired, or you spend money on assets, which are wholly used for non-business purposes.

There are a number of conditions that must be satisfied for an activity to be within the scope of UK VAT.

An activity will fall within the scope of VAT when all the following conditions are met:

• it is done for consideration;
• it is a supply of goods or services;
• the supply is made in the UK;
• it is made by a taxable person; or
• it is made in the course or furtherance of any business carried on or to be carried on by that person.

One of the conditions that needs to be carefully considered when deciding whether an activity is within the scope of VAT is the concept that the supply must be made in the course or furtherance of business. 

This idea of 'business' is one of the less well-known conditions. However, the concept of business is an important condition that determines whether a business must charge VAT on their sales, known as output VAT, and on its ability to recover VAT, known as input tax.

In most cases it will be clear whether an activity is ‘business’ related and should fall within the scope of VAT. However, in cases where the result is less clear cut, there is a test based on an historic court case where the court identified six factors or indicators to determine whether an activity was ‘business’ related. The test should be applied to individual activities separately. 

HMRC’s internal manuals provide the following example:

Imagine a person registered as a self-employed plumber who now and again renovates old cars. They do not automatically have to charge tax when selling those cars. This is because it would be hard to see the activity of car renovation being included within their business as a plumber.

On the other hand, if the car activity can be seen to have the attributes of a business in its own right, then the plumber would have to charge tax on the sales.

In most cases, a supply of goods or services for VAT purposes is deemed to have taken place in return for consideration. This is usually payment in money but can also be of a “non-monetary” nature, such as goods or services supplied in return. There is no legal definition of consideration in the VAT Act 1994.

However, HMRC quotes the following definition in its internal manuals that was taken from the EC 2nd VAT Directive Annex A13 (at the same time accepting that this is no longer in force after Brexit).

The expression “consideration” means everything received in return for the supply of goods or the provision of services, including incidental expenses (packing, transport, insurance etc), that is to say not only the cash amounts charged but also, for example, the value of the goods received in exchange or, in the case of goods or services supplied by order of a public authority, the amount of the compensation received.

There are additional provisions in UK law that treat certain transactions made for no consideration as supplies for VAT purposes. These are:

• the permanent transfer/disposal of business assets;
• the temporary application of business assets to a non-business use; and
• the self-supply of goods or services.

A supply is also deemed to have taken place if business assets are retained after VAT deregistration and where services are put to a private or other non-business use where input tax had been previously recovered.

The VAT treatment of motoring expenses is relevant to any business that incurs VAT on motor expenses.

We have covered below some important points to be aware of concerning the recovery of input tax (VAT) when leasing vehicles:

• Leasing company recovering VAT on purchase of cars. A leasing company can usually recover the VAT incurred as long as the cars are leased at a commercial rate.
• Business leasing a car and recovering the VAT. If a business leases a ‘qualifying car’ for business purposes, they can generally recover 50% of the VAT charged. The 50% disallowed covers any private use of the car. The business can reclaim the remaining 50% of the VAT charged, subject to the normal rules.
• Cars leased primarily for taxi or driving instruction. A business can reclaim all of the VAT charged on the lease if the car is a qualifying car and the business intends to use it primarily for:
  • hire with a driver for carrying passengers; or
  • providing driving instruction.
• The 50% block on VAT recovery also applies to self-drive hire (daily rental) as well as leasing. This restriction applies if the car is hired simply to replace an off the road ordinary company car.

There are special rules to help ensure that goods sent from abroad are taxed appropriately. The aim is to not disadvantage UK businesses supplying goods in the UK, for example, by having to compete with VAT free imports. This includes goods that are new or used and bought online, bought abroad and shipped to the UK, and goods received as gifts.

This means that in order to receive your goods you may have to pay VAT, Customs Duty or Excise Duty if they were sent to:

• Great Britain (England, Wales and Scotland) from outside the UK.
• Northern Ireland from countries outside the UK and the European Union (EU).

VAT is charged on all goods (except for gifts worth £39 or less) sent from:

• outside the UK to Great Britain; and
• outside the UK and the EU to Northern Ireland.

Online marketplaces that facilitate the sale of goods are usually responsible for collecting and accounting for the VAT. If the VAT has not been collected, then you will have to pay VAT to the delivery company either before the goods are delivered or when you collect them. If you have to pay VAT to the delivery company, it’s charged on the total package value which includes the value of the goods, postage, packing, insurance and any duty owed.

Generally, there are no Customs Duty payable on non-excise goods worth £135 or less. There are various rates payable above this level and on excise goods of any value.

There are four options for the VAT treatment of road fuel costs.

1. Treat all of the VAT as input tax because 100% is used for business purposes. This option only applies to fuel for cars used exclusively for business purposes, such as pool cars.
2. Treat all of the VAT as input tax and either apply the fuel scale charges or account for VAT on the basis of amounts charged to the employee. If a business makes a charge for the private use of fuel it can opt to account for output tax on the basis of the amount charged to the employee. Or it can opt to apply the fuel scale charge instead of accounting for VAT on the charge made. The scale charge is a fixed amount and saves business car users the chore of keeping detailed records of actual private mileage.
3. Use detailed mileage records to separate the business mileage from the private mileage. This option will require businesses to keep detailed mileage records to demonstrate that only the business element of the VAT charged on fuel has been treated as input tax.
4. Treat no VAT incurred as input tax. This option allows businesses to choose not to pay the relevant scale charges. If they do this, they must not recover input tax on any road fuel bought by the business. Any business that opts to use this concession must do so in respect of all fuel used by it in all vehicles including commercial vehicles.

This is a complex area and care needs to be taken to ensure the best possible method is used considering the many variables at play.