Over VAT threshold but zero rated supplies

Registering for VAT when making zero rated supplies

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My client's turnover is very close to the VAT registration threshold. The work he does is construction related work on new homes and therefore zero rated. If registered for VAT he will permanently receive small refunds. My understanding is that I should apply for registration and ask for exemption to see if it gets granted. Is my thinking correct?

Replies (13)

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By Duggimon
10th Mar 2021 15:08

No, your thinking is not correct, for your client is due many refunds and you are seeking to exclude him from them for no clear reason.

Also, he's making VATable supplies of more than £85,000 a year, on what basis could he be exempted?

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Replying to Duggimon:
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By Paul Crowley
10th Mar 2021 22:30

I am confident that HMRC most certainly do permit traders to be exempted where they would be always refunded

I always thought it better to register.

My former partner thought it a good idea for people he thought not up to operating VAT

Edit
Just looked down
Beaten to it

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By Matrix
10th Mar 2021 15:15

Why have you waited this long to register?

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VAT
By Jason Croke
10th Mar 2021 15:45

When a business goes over the £85k taxable threshold, they are required to notify HMRC and register for VAT. Zero rated sales are taxable sales and so count towards the £85k.

However, where the business only makes zero rated sales and exceeds the £85k threshold, then the correct process is to notify HMRC that they've gone over the £85k but to then also ask for exemption from VAT registration, on the basis you only make zero rated sales and you waive your right to reclaim input tax.

Paragraph 3.1.1
https://www.gov.uk/government/publications/vat-notice-7001-should-i-be-r...

So what you propose is correct, its a little know "deal", if a zero rated trader doesn't want to reclaim input tax, that suits HMRC fine as no VAT going out of Treasury to line the traders pocket.

If the business has a small value of standard or reduced rated income (the odd job here and there), it can still apply for exemption but needs to demonstrate that the output due to HMRC would be less than the inputs being reclaimed, so only really works if fully zero rated sales, and input tax is minimal (ie, labour only builder).

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Replying to Jason Croke:
ghm
By TaxTeddy
11th Mar 2021 06:36

Valuable information Jason, I didn't know that.

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RLI
By lionofludesch
10th Mar 2021 16:45

What if your client buys a van ?

Sure he can apply for exemption but is it a smart move ?

If form filling is a nuisance, consider annual returns.

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By fawltybasil2575
10th Mar 2021 18:26

@ OP.

You ask whether you should "apply for registration and ask for exemption" - that is strictly a contradiction in terms (as you are, more strictly the client is, contemplating applying for exemption FROM registration).

I assume that the client is a subcontractor to a building company [perhaps (say) a decorating business which engages other self-employed decorators who are not themselves VAT-registered - materials being purchased by the building company]. This would explain why you say that only “small refunds” would be received if the client were to register – a building company would of course almost always incur Input Tax, on Materials alone, of a relatively large (certainly not “small”) figure.

No action is of course required unless and until the client has exceeded the registration limit [unless, very exceptionally, it expects taxable turnover of over £85K in the next 30 days alone].

Submitting a letter to Wolverhampton, explaining the rationale (supported by estimated figures) as a request for exemption from registration, is IMHO the appropriate action. Such letter (from the client) should state, if correct, that no (or, if relevant, very little) SR and/or reduced rate work is expected to be undertaken; and that one wishes to forego the ability to reclaim Input Tax (on the grounds that one considers it not expeditious in relation to the administration costs arising from registration).

Of course, if circumstances change in the future, such that significant SR and/or reduced rate work is to be undertaken, then the client can register then (whether compulsorily if it has exceeded the registration limit, or voluntarily if such limit has not been exceeded).

Basil.

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Melchett
By thestudyman
11th Mar 2021 08:48

Not sure i understand the logic of not wanting to register because the refunds will be small. The client is in a fortunate position and should not turn down claiming input tax with no vat to be collected!

Yes please to better cash flow.

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Replying to thestudyman:
VAT
By Jason Croke
11th Mar 2021 09:41

It isn't logical, but I've had a few clients over the years where they just don't want the hassle of VAT returns.

If the turnover exceeds £85k then they could register but would also need to be MTD compliant so even if they were preparing the returns themselves to save money, they'd then have to get their heads around bridging software or pay for cloud accounting license, so I can see how for some, its not worth the hassle plus get it wrong and you're exposed to penalties.

As long as the client is informed as to the pros and cons, then its up to the client at the end of the day. Seeking exemption from registration doesn't prevent the business from registering for VAT at anytime in the future, so if they do intend to buy something significant they can always register for VAT.

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By fawltybasil2575
11th Mar 2021 10:16

I endorse Jason’s comments (his last post at 9.41).

It is a matter of personal judgment, as I said in my last post, as to whether to register or not, in the relevant circumstances.

I have known clients who have registered, in order to save (literally) £40 per annum; but also a client who in current day value terms, decided against a VAT registration even though he would have benefitted by approx. £7,000 per annum.

The administration costs themselves could exceed the VAT recoverable. To add to Jason’s further point re Penalties etc, we have of course seen the introduction of the “reverse charge”, to those in the construction industry. Hence, where any of the client’s customers are VAT-registered, one could have the additional burden of risks arising from deciding whether VAT should be added, or not, to one’s invoices (and the corresponding potential problems re “VAT” being incorrectly charged by one’s own subcontractors).

Just to add to Jason's last point of "if they do intend to buy something significant they can always register for VAT", Lion of course made the similar point, in his post yesterday (at 16.45) of acquiring a Van.

As both Lion and Jason will be aware, where one acquires such a capital item, there is not necessarily any need to register immediately, in order to reclaim the Input Tax on that capital item, since one could register for VAT up to 4 years later, and still claim that full Input Tax figure.

Basil.

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By JD
11th Mar 2021 10:33

Given the direction that MTD is going, with its quarterly admin burden and cost, any benefit from obtaining and exemption now, presumably will be short lived.

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Replying to JD:
RLI
By lionofludesch
11th Mar 2021 15:53

JD wrote:

Given the direction that MTD is going, with its quarterly admin burden and cost, any benefit from obtaining and exemption now, presumably will be short lived.

That's a very good point.

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By jvenegas16
19th Mar 2021 14:02

Related work on new homes does not mean that everything is zero-rated, which is not clear from your post. I do not see how HMRC will grant exemption if your client is in the construction industry.
It is just a matter of ticking the box for that, but you must give reasons. Then, what if there is a change of supply, e.g. repairs, working on a conversion (at reduced rate)?

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