VAT Pitfalls

Contractors		Documents
IR35		Lettings
Outsourcing		Remittances
Residence		Start Ups
VAT Pitfalls		Wills

With the introduction of penalties for late registration, late returns and mis-declarations, it can now be expensive to make a mistake with VAT. In addition to the penalties, there is also interest to pay on most mis-declarations, although interest is not payable where the result of the error is less than £2,000 and a voluntary declaration of errors is made.

ERRORS

OUTPUT TAX ERRORS

Charging the wrong rate. An easy mistake with complex transactions especially with Land, printed matter, services to overseas clients, and some food products.

Assets used privately

Where the owner of a business takes assets or goods, this will normally be treated as a supply. Output tax will be calculated on the price which would be paid on the open market if the goods were sold, or services supplied, in the normal way. In the case of services, a fair and reasonable apportionment of the cost of the service has to be made.

Land

Supplies of some land can be standard rated, where there is an option to tax. This option allows input tax to be recovered with might otherwise be lost under the partial exemption rules. A gift of standard rated land should carry VAT.

Deregistration

Where a business deregisters from VAT, then the goods and assets held at the date of deregistraion are normally treated as a taxable supply on that date.

Petrol & Diesel

Output tax will be due whenever fuel is supplied to an employee for their private use, unless the full cost (inc. VAT) is passed on to the employee. The same applies to the owner of a registered business who uses any fuel for private purposes.

Sponsorship and Gifts

Donations to charities ‘without strings’ normally provide no problems. However, where advertising or publicity arises out of the gift, then output tax will be due from the donor, and possibly the recipient.

Supplies to employees

Where employees receive free food or drink from a canteen then no tax is due. However, where a charge is made to the employee, the tax is due on the value charged.

The Tax Point

Output tax must be charged at the time of supply. Care needs to be taken where a deposit or prepayment is made for goods or services, which normally constitutes a tax point.

INPUT TAX ERRORS

Exempt supplies

Where input tax is not directly attributable to taxable supplies, VAT may not normally be recovered. Input tax attributable to exempt supplies is normally only recoverable where it is less than £625 per month on average, and not more than one half of all the input tax for a VAT year of account.

Non deductible input tax

Vat charged on a motor car is not normally recoverable where there is any element of private use. For cars less than 4 years old, only 50% of VAT on lease rentals is recoverable. Care needs to be taken with vans and pickup trucks. Seating for more than the driver and a passenger will normally class the vehicle as a car
Entertaining, which is widely defined

OUTPUT AND INPUT TAX ERRORS

Being in possession of the correct documentation is vital not only for goods or services purchased, but also for sales, especially those with are zero rated where goods are sold to a customer from another EEC state.

VAT cannot be claimed on pro forma invoices, invoices made out to someone else, non UK invoices, invoices which do not show a VAT number, or personal expenditure.

PENALTIES

Failing to register at the correct time

Every non registered business must monitor its turnover over a period of one month, and twelve consecutive months, to ensure than the turnover limit has not been exceeded. Failure to register by the correct time may result in Penalities.

Failing to submit returns on time

Incorrect returns

Errors discovered by the Customs & Excise may carry a 15% mis-declaration penalty. Failure to submit an EU sales statement may give rise to penalties.

SPECIAL DIFFICULTIES

Property & construction

This area is probably the most complex part of VAT regulation, with many pitfalls for the unwary, and where timing may be crucial. Some property interests are standard rated, some are exempt, are few are zero rated, and some are taxable by virtue of an ‘option to tax’. This is where a landlord elects to charge VAT on interests in land, which would otherwise be exempt.

Transfers of a business

Most business transfers as a ‘going concern’ are not liable to VAT. Care needs to be exercised to ensure that the term ‘going concern’ is fully understood, and the relevant conditions are followed.

International business

Care has to be taken when supplying goods or services to someone overseas. VAT may or may not be chargeable depending whether the purchaser is EU or non EU resident. Operation of the ‘reverse charge’ procedure may be necessary for goods bought from another EU member state.

AND FINALLY

VAT needs to be taken seriously, as there are unpleasant penalties for persons or businesses who get it wrong. If in doubt seek professional guidance.

The areas of taxation referred to in these section are complex, and advise should always be sought in writing, before relying on any specific provisions. Please use the response form by clicking on the link "Contact Us" above, or for further advice contact one of the Partners on +44 1273 202071.