I've just picked up a new client in the food industry (catering and non catering). Looking through the previous accountants VAT returns a few things are evident. They always recover 100% of input VAT and make no annual adjustment for partial exemption. Since 78% of net sales are hot food (VAT charged) and 22% of sales is on cold food (no VAT charged). I would expect partial exemption rules to apply?
My understanding of the way partial exemption works is as follows: The value of standard rated supplies (say net £1,300) are separated from zero rated (say £200) the % value of net standard supplies over all supplies (in this case 86%) is used to recover the non-specific input VAT in the quarter. All standard related inputs are recovered in full, and all exempt related inputs are not recovered. Then once every 12 months (when? I'm not sure, but think its the 1st VAT quarter following the accounting year end) there is an annual recalculation of the partial recovery rate (so 86% in Q3 might become an annual rate of say 82%, and there will be more input VAT to repay back to HMRC). Is this right?
My client thinks he pays too much VAT with the old accountant. But once I hit him with partial exemption he'll recover less VAT and will have to repay the over recovery from previous months! The previous accountants are a reputable firm so I'm surprised they've not identified partial exemption, is there anything to suggest here that partial exemption rules do not apply? Turnover levels? % of zero rated supplies being de minimis? Thank you.