Many businesses, especially new and smaller ones, worry about VAT and it’s myriad of rules and regulations – is this vatable?, can I claim this on my VAT return?, what rate of VAT should I use? and, what about VAT schemes? are just a few of the common questions.
Some of these questions are due to the way that VAT has evolved, from what was set up as a simple tax to replace purchase tax way back in 1973, to be a very complex tax. For example, consider the following questions :
- How many rates of VAT are there?
Most people would answer one (20%) but in fact there are several:
- zero rated
- reduced rates
- standard rated (currently 20%)
- and then there are “exempt” items and items that outside the scope of VAT
The reduced rate of VAT applies to some goods and services such as heating fuel and childrens’ car seats amongst other items but sometimes an item’s rate changes depending on circumstances or who the customer is (for example if you have electricy supplied it is standard rated if you are a business – unless you use less than 13 units a day – and reduce rated at 5% if you are a residential customer or a charity that is using it for non-business). Another example is tolls on bridges, tunnels and roads, if these are operated by a public authority then they are outside the scope of VAT, but if the bridge/road/tunnel is privately operated the toll fee is standard rated for VAT purposes. Similarly water supplied to an household is zero rated but if you are an industrial customer it is standard rated.
- Is a chocolate cover tea-cake a cake or a biscuit?
It seems that HMRC decided it was a biscuit and therefore vatable until challanged by Marks and Spencer in the courts, the court decided that it was a cake so there is no VAT on them.
As you will see from the HMRC guidelines:
- tea is zero rated yet Purgative and laxative “teas”, such as senna, and similar medicinal teas are standard rated
- milk and milkshakes are zero rated but milk shake flavourings (apart from coffee and cocoa) are standard rated
You can claim back “input tax” as long as it’s been incurred in the course of your business (like any tax) but if it’s something that you use for both business and non-business use then you can only reclaim a proportion of the total VAT you were charged, so if you buy a computer and use it 75% of the time for your business and 25% of the time for personal use then you can only claim back 75% of the VAT. You should note that motoring expenses and road fuel have different rules and you should check these before trying to claim anything back.
Vat schemes are an attempt to make life easier for businesses by basically allowing them to account for the VAT that they have collected based on their turnover, some of these schemes have been designed for specific trade sectors such as tour operators, the second hand and antiques sector, caterers, chemists and florists. It would be worth talking to your professional adviser if you ae interested in this “simplified” method of accounting for VAT to see is there is a scheme that would be beneficial to you.
This article can’t hope to answer all of your questions and if you are running a business and are unsure of what to do then there are several options open to you, you can contact the local VAT enquiry office, talk to your accountant or even attend a training course.