This is an area often overlooked. We can provide guidance to ensure compliance with all the regulations whilst not overlooking any planning opportunities. Adherence to regulations and planning is as important here as anywhere else. General guidance on some issues is given blow – please scroll down to any topic that is of interest.

Government Departments
Rates of VAT
Annual accounting scheme
Flat rate scheme
Registration and deregistration
Exemption and zero-rating
Income and expenses
International matters
Other aspects

Government Departments
The (former) Inland Revenue and VAT department of H. M. Customs & Excise have always had a close working relationship and are empowered to share information. This position will strengthen as the two departments are now merged into one authority, H. M. Revenue & Customs, HMRC.

Rates of VAT
Standard rate – 20%
Reduced rate – 5%

Annual accounting scheme
If your business has a turnover below a set level you can now choose to file only one VAT Return a year.

Flat rate scheme
Under this scheme smaller businesses can choose to pay a flat rate of VAT. The rate is dependent on the nature of the business and scales vary widely. Check with us to see which rate is applicable to your business.

Business are required to issue invoices to customers under the flat rate scheme but not necessarily to keep all records of income and expenses.

WARNING – there is some doubt as to how tax inspectorate view this scheme as the rules of that departmental section state clearly that full records are required to be maintained.

Registration and deregistration
Separate thresholds are set for registration and deregistration.

A trader needs to check if any of the following conditions apply from April 2020. If any is answered “yes” it would be advisable to consider registration:

1. Has the turnover of the business exceeded £85,000 in the 12 consecutive months just ended? In this case registration is mandatory within 30 days.

2. Is the entire £85,000 amount likely to be received in the next 30 days? Here, Customs and Excise should be approached immediately as registration is required before those next 30 days’ sales are made.

3. Am I approaching the £85,000 threshold? Is my business expanding? It would be advisable to review the business particularly to see if record keeping is adequate to cope with VAT. Also consideration should be given to possible advantages of voluntary registration.

If turnover falls below the above mentioned registration limits it may be possible to cancel registration. The levels of turnover applicable to deregistration vary from year to year.

Exemption and zero rating
These are often confused. Frequently it is thought they are identical categories.

“Exemption” indicates that the particular trading activity is entirely outside the scope if VAT regulations. The result is that no VAT is chargeable on sales but no VAT is reclaimable on expenses. Examples include most medical or educational services.

“Zero rating” means the business charges VAT but at 0% and it is entitled to claim qualifying VAT on expenses. In these circumstances VAT refunds may occur.

This tax is administered by HMRC which has very wide ranging powers. Such powers include imposing penalties for many offences – for example, late registration, inaccurate preparation of VAT Returns (including negligence and fraud), insufficient records and deliberate arranging of finances to avoid the need to pay/charge VAT (for example, a pub landlord creating separate food and drink “businesses” within the same establishment claiming each is below the registration threshold).

Income (“outputs”) and expenses (“inputs”)
Sales invoices must be issued to cover all trading income. These invoices must contain certain details as laid down in law. Amongst other things it must be clear how VAT has been charged in the invoices. VAT so charged must be paid over to Customs but VAT suffered on expenses can reduce the bill.

Virtually all VAT paid on business expenses can be reclaimed via the VAT Return form. It is necessary to prove any claims. Typically, this is achieved by keeping proper VAT receipts for expenses.

In some circumstances it is possible to reclaim VAT paid on expenses before registration.

As always there are exceptions to the general expense principle. For example, VAT on road vehicle fuel is subject to special rules, no VAT on entertainment is reclaimable (except for certain foreign and “staff” entertainment) and land/property regulations impose their own rules for VAT. There are many others.

If a trader makes “mixed” sales, i.e. some sales taxable and some not, it may be possible to take advantage of a special Retail Scheme (there are several) to ease the burden of calculating VAT reclaimable. Approval must be obtained from the VAT Office if such a scheme is to be used.

Income and expense records may be inspected periodically by visits from Customs officers. The frequency of these visits will depend on a number of factors – nature of business activities, accuracy of records kept, co-operation of the trader etc. Customs will decide how often to visit and the first visit after registration is, we feel, the most important. The success, or otherwise, of this first visit can guide Customs in their decision.

If rules are broken, mistakenly or deliberately, interest and penalties can be severe. Advice must be taken promptly from appropriately qualified persons if any VAT questions arise. Remember that time limits are most important.

International matters

Special rules apply if goods/services are provided by a UK registered business to a person/business based in another EC country. A VAT charge may not be necessary but other statistical information may still be required (the “Intra Stat” rules). It is also important to establish whether the goods/services are provided to the recipient in its business or personal capacity.

In general, goods/services provided to a customer outside the EC are outside the scope of VAT. If so, a VAT charge may again be unnecessary.

Other aspects
ROAD FUEL SCALES CHARGES – latest scale charges for deemed “private motoring” of cars are available here at the HMRC website here…..

BAD DEBTS – recovery of bad debts is now automatic after 6 months’ non-payment has passed. Conversely, VAT input tax is not reclaimable if a purchase invoice is unpaid after 6 months.

It is vital that VAT on any bad debt is reclaimed within 4 years, after the 6 months above, otherwise no claim will be allowed.

It is not necessary for a trader writing off a debt to notify the purchaser of this action in writing.

FINES – late returns may be subjected to a “default surcharge”. However, the HMRC VAT office would rather “educate” business to improve their Return rate than penalise.

BUILDINGS – zero or a reduced rate may be on residential conversions/renovations and improved treatment of “zero rating” for charitable part-use of a building. Call us for full details.


ALL VAT Returns and payments MUST be made ONLINE.

The only exceptions are when going into insolvency or if you have
religious grounds for not using electronic equipment.

We can file your VAT online for you if you wish.

Call us for advice.