In the second of a four-part series, Neil Warren shares some VAT planning tips linked to registration issues, which could save clients some money.
Pre-registration input tax
When a business completes its first VAT return, it needs to be aware of the expenses on which it can claim input tax incurred before its date of registration:
Include purchases of goods in the four-year period before registration, where those goods have always been used in the business and are still owned on the first date of registration.
The usual rules apply to such claims: VAT must have been charged by the supplier, and a tax invoice is held to support the claim. The definition of goods includes both stock and assets.
The VAT claimed is the amount paid to the supplier; there is no need to reduce the amount claimed to allow for wear and tear of the items. See example 1.
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The time period for purchases of services is limited to six months before registration, and the service must not have been consumed before registration.
This would be the case where a subcontractor (Sam) charged VAT on his services to Alpha Ltd, which formed part of a contract supplied and invoiced by Alpha Ltd to its customer in the period before Alpha became VAT registered. No output tax is accounted for on the sale by Alpha Ltd, so no input tax can be claimed on the related expenses of that particular contract including the amount that Sam the subcontractor charged to Alpha.
Steve is a decorator and has traded for 10 years, but did not become VAT registered until 1 June 2017. He purchased a van on 1 August 2014 for £5,000 + £1,000 VAT and bought some tools on 1 May 2012 for £2,000 + £400 VAT.
The tools and van are still owned on 1 June 2017. A subcontractor Mike charged a total of £12,000 + £2,400 VAT in the six-month period before VAT registration, but Steve invoiced his customers for half of the jobs which involved Mike before Steve became VAT registered.
On his first VAT return, Steve can claim input tax of £1,000 from the van purchase and £1,200 from Mike’s invoices ie in relation to the jobs that will be invoiced by Steve after 1 June. No input tax can be claimed on the tools because they were purchased more than four years before the date of registration.
Flat rate scheme (FRS)
There are two worthwhile tips for a newly registered business as far as the FRS is concerned:
A 1% discount is given on the relevant flat rate category for the first 12 months of VAT registration. For example, a management consultant would account for FRS tax based on 13% rather than 14% of his gross income for the first 12 months of VAT registration.
However, be aware that the discount is only available for the first 12 months of registration, not the first 12 months of using the FRS. Say a business registered for VAT on 1 January 2017, but did not join the FRS until 1 July 2017, the 1% discount is only available until 31 December 2017 and not 30 June 2018 (HMRC Notice 733, para 4.7).
A flat rate scheme user can claim pre-registration input tax on its first VAT return in exactly the same way as a non-scheme user. This is a welcome concession because FRS users can usually only claim input tax on capital goods costing more than £2,000 including VAT.
The good news is that a business can go back up to four years and register for VAT on a voluntary basis. The business must have either made sales or intended to make sales, for the period of registration. How does this work in relation to past sales which will be subject to output tax if a registration is backdated?
Janet is a computer consultant who only works for clients who are VAT registered, and so are able to claim input tax. Her accountant has suggested she backdate her registration to 1 August 2013 (four years), which will enable her to claim input tax on all her expenses for this extended period, plus a claim on pre-registration expenses as well. Total fees during this period were £240,000.
- On her first VAT return from 1 August 2013 to 31 July 2017 Janet accounts for output tax of £40,000, i.e. the fees are treated as inclusive of 20% VAT: £240,000 x 1/6 = £40,000.
- Janet issues VAT-only invoices to her clients on 12 September 2017 when her VAT number is issued by HMRC. These invoices amount to £48,000: £240,000 x 20%. The clients pay this VAT in October 2017. Janet will account for output tax of £8,000 on her October 2017 VAT return ie £48,000 x 1/6 = £8,000.
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.