VAT – Seven Key Points For The Smaller Business

If you are starting or have recently launched a business in the Nottingham area, AHACCOUNTANTS can assist you in complying with VAT regulations. This factsheet outlines seven critical VAT areas to consider, emphasizing common risk factors that can help minimize errors and penalties through better understanding and diligent record keeping. For comprehensive guidance, please refer to the GOV.UK website or our factsheet on Making Tax Digital for VAT.

1. VAT Return and Payment Deadlines

For businesses completing quarterly or monthly returns, both the VAT return and any payable VAT are typically due to HMRC one month and seven days after the VAT period ends. If the due date falls on a weekend or bank holiday, ensure that your return and payment are submitted by the last working day before the deadline.

2. Input Tax

VAT incurred on business-related expenditure, known as “input tax,” can be reclaimed only by VAT-registered businesses under specific conditions:

• The expense must be incurred for business purposes.
• The business must be the recipient of the supply of goods or services.
• A valid VAT invoice must be obtained.

Input tax cannot be reclaimed on purchases from non-VAT registered businesses, and proforma invoices are not valid for input tax recovery.

3. Business Purpose

Determining whether expenditure qualifies for input tax recovery can be contentious. To reclaim VAT, the goods or services must directly relate to the function of the business rather than providing incidental benefits.

Common Risk Areas:

• Domestic accommodation without business connection.
• Personal interests unrelated to business operations.
• Expenditure for directors’ personal benefit.

For mixed-use expenditures, the related VAT should be apportioned accordingly.

Example: If three laptops are purchased for business use and one is later gifted to a family member, the VAT accounted for must be adjusted to reflect the private use.

4. Business Entertainment

VAT on most business entertainment expenses is not reclaimable, with the exception of employee entertainment. The term “business entertainment” broadly includes hospitality provided to non-employees. However, travel expenses reimbursed to non-employees may be subject to VAT recovery.

5. Business Gifts

When business goods are given away, VAT is due unless the cost of gifts to the same individual does not exceed £50 within a 12-month period. If the £50 limit is exceeded, VAT is payable on the full value, but businesses may not need to reclaim VAT on the purchase of the goods, simplifying record-keeping.

Routine Examples: Long service awards, Christmas gifts, and prizes for staff can fall under this rule.

6. Cars and Motoring Expenses

Common errors arise concerning VAT on cars and motoring expenses:

• VAT on motor car purchases is typically blocked from recovery due to private use assumptions, unlike commercial vehicles.
• For leased cars, 50% of the VAT on leasing charges is blocked.
• Fuel or mileage allowances for cars require adjustments to ensure only business-related VAT is reclaimed.

If you face challenges regarding motoring expenses, reach out to discuss the applicable adjustments.

7. Output Tax Issues and Bad Debts

When goods or services are sold on credit, there’s an inherent risk of bad debts. Suppliers must account for output tax even if the customer never pays. VAT regulations allow for bad debt relief claims six months after the due date for unpaid invoices.

Example: If goods are invoiced on 19 October 2022, and payment is not received by 18 November 2022, relief can be claimed starting from 18 May 2023.

Preventing Bad Debt Issues: Smaller businesses with annual turnover under £1.35 million may join the Cash Accounting Scheme, allowing VAT accounting on sales only when payment is received, benefiting cash flow and providing built-in relief for bad debts.