Value Added Tax (VAT) is one of those areas of tax that can feel simple, but in reality often trips up business owners. While much of day to day VAT management can often be relatively straightforward, the more nuanced aspects of VAT in more complex transactions – or even seemingly simple ones – can easily sneak through without an experienced accountant advising.
Here, Haines Watts Leicester Associate Director and VAT specialist Julie Green explains some of the common scenarios that business owners need to be aware of – and how to keep your business free from surprises.
1. Timing VAT Threshold Changes
VAT thresholds are a basic principle for most businesses when it comes to managing their VAT obligations – go over a certain revenue and you’re required to register. However, deregistration can be a subtle balancing act as it's not always as simple to de-register once you’ve gone over the registration threshold.
One issue businesses often overlook is the VAT implications of deregistering after making substantial purchases like property. According to HMRC guidelines, if a business’s turnover falls below the VAT deregistration threshold, which is currently £90,000, the business can opt to deregister. However, complications arise when previously reclaimed VAT on assets like property needs to be monitored over a long period—typically up to 10 years under the Capital Goods Scheme.
For instance, if VAT was reclaimed on a property costing more than £250,000 plus VAT, and the business later deregisters within 10 years, this can trigger a VAT clawback if the property's use changes or if it's no longer used for taxable purposes. This often results in an unexpected VAT liability that can be substantial.
When a business deregisters for VAT, HMRC sends out a form, and it's crucial that business owners or their accountants are thorough in completing this. However, changes in personnel over time can lead to a loss of knowledge about these obligations.
How to avoid this:
- Always keep detailed records of property purchases and VAT claims.
- If considering deregistration, assess the long-term implications on any assets purchased, especially if VAT has been claimed on them.
- Review your VAT position and seek professional advice before making any significant business changes like deregistration.
2. Opt to Tax on Property Transactions
Another common VAT issue arises in property transactions, where businesses fail to opt to tax a property correctly.
Opting to tax allows businesses to charge VAT on the sale or rental of commercial property and to recover VAT on associated costs. However, this election must be made formally with HMRC and is essential for transactions involving commercial property.
Failure to opt to tax can lead to severe consequences. For example, selling a property without opting to tax means VAT cannot be charged on the sale, which could prevent the business from recovering VAT on related expenses. This mistake can result in large, unexpected VAT liabilities.
How to avoid this:
- Before buying or selling commercial property, ensure you understand whether opting to tax is necessary and beneficial.
- The process involves completing a straightforward form with HMRC, but it's crucial to do so before the transaction takes place.
- Reviewing all transactions with a VAT advisor beforehand can prevent costly errors and ensure compliance with VAT rules.
3. Attempting to Claim VAT Without a Proper Invoice
A frequent VAT issue is attempting to reclaim VAT without having a proper VAT invoice. The VAT legislation generally requires that VAT can only be reclaimed if a valid VAT invoice is provided, detailing the supplier's VAT number, the amount of VAT charged, and other key information. Pro-forma invoices, which are often issued before goods or services are delivered, do not meet these requirements and cannot be used to reclaim VAT.
This is particularly problematic for businesses that rush to reclaim VAT without waiting for the correct documentation, leading to denied claims and potential penalties from HMRC.
How to avoid this:
- To ensure compliance, always request a proper VAT invoice from suppliers and refrain from reclaiming VAT until this documentation is received.
- Reinforce with your accounts payable team the importance of proper invoices and regularly audit your VAT claims to ensure they align with HMRC requirements.
4. Reclaiming Incorrectly Charged VAT
Businesses in industries with complex VAT rules, such as construction, often face the issue of reclaiming VAT that was incorrectly charged by suppliers.
Certain goods and services, like the construction of new residential buildings, may be zero-rated or subject to reduced VAT rates (e.g., 5% for certain renovations). However, suppliers, particularly small builders, might mistakenly charge the standard 20% VAT.
If VAT is charged incorrectly, it cannot be reclaimed, even if it was paid in good faith. This often leads to losses, as the responsibility for correct VAT application lies with the supplier, and businesses must be vigilant in verifying VAT charges.
How to avoid this:
- When receiving invoices, especially in industries with variable VAT rates, double-check that the VAT charged is correct.
- For larger projects, work with VAT specialists to review VAT treatment on all invoices. If an error is detected, request a corrected invoice from the supplier immediately.
Covering Your Basics on VAT
Like all areas of compliance, VAT requires careful attention to details. Over time and with major transactions, seemingly small errors can add up to significant financial consequences for businesses. And in cases where documentation or records are incomplete, you may miss out on your chance to fix the issue.
Your best defence against VAT pitfalls is a sound, consistent process for handling bills, transactions and client interactions – something that can easily get overwhelming when you’re trying to grow your business. And when it comes to major transactions – or multi-stage exchanges – it’s easy to miss key details that can cost you in the long term.
Haines Watts VAT professionals have decades of experience in helping businesses of all types navigate that VAT landscape, from start ups to international leaders. To find out how we could help you, get in touch with our team today.
