VAT returns and partial exemption

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VAT returns and partial exemption

• September 2009
• Helen Elliott
• Thandi Mtetwa

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Agenda

• Background
• VAT recovery
• Annual adjustment
• Methods
• VAT in accounting system
• Completing the VAT return
• Other issues

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Background Types of supply
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Background Types of supply
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Background Non-business activities

• Outside the scope of VAT
• Donations freely given
• Grants
• Subsidised welfare activities(charge less than
  85 of cost)
• Subsidised fees in particular situations
  (nurseries etc)

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Background Exempt supplies

• welfare
• residential care
• nurseries
• training activities
• medical care
• education

• cultural activities
• fundraising events
• renting land buildings
• lotteries and bingo

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Background Zero-rated supplies

• Sale of donated goods
• Export of goods
• Sale of publications, books, newspapers
• Sale of childrens clothing footwear
• Some passenger transport
• Some food

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Background Reduced rate supplies

• Welfare information and advice (that does not
  qualify for zero-rating) eg posters, DVDs
• Smoking cessation products
• Contraceptives
• Womens sanitary products
• Childrens car seats

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Background Standard-rated supplies

• Everything else!
• Consultancy fees
• Information supplied electronically eg pay
  access websites
• Management charge to trading subsidiary
• Royalties

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VAT recovery Meaning

• Recovering VAT deducting VAT incurred on
  purchases (input VAT) from VAT on sales payable
  to HMRC (output VAT)
• Input VAT is recoverable if the associated
  purchase

• Is used in making taxable supplies or
• Is used in making exempt supplies, and exempt
  activity is de-minimis

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VAT recovery Example
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VAT recovery Blocked input VAT

• VAT on some types of purchase is always
  irrecoverable whatever the purchase is used
  for
• The purchase of cars with some element of private
  use
• VAT on business entertaining, eg taking business
  customers out for meals. But excludes staff meals
  and meals for beneficiaries (eg in a care home)

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VAT recovery Residual VAT

• VAT which is not wholly used in making one type
  of supply is called residual VAT.
• Residual VAT VAT that is attributable to a mix
  of different types of supply
• Examples of residual VAT for charities with a
  mix of non-business, exempt and taxable
  activities, overheads are usually residual eg
  gas and electricity bills, audit fee, telephone
  charges

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VAT recovery Steps

• Direct attribution
• Business / non-business method
• Partial exemption method
• De-minimis test

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VAT recovery 1. Direct attribution

• VAT on purchases used wholly in making one type
  of supply is directly attributed to that type of
  supply

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VAT recovery 2. Non-business method

• In step 2, residual VAT must be apportioned
  between business and non-business supplies
• Business supplies taxable supplies exempt
  supplies.
• If there are no non-business activities skip
  step 2- all residual VAT goes into step 3
• This apportionment is known as the business /
  non-business method
• The residual VAT apportioned to non-business
  activities is irrecoverable
• The residual VAT apportioned to business supplies
  goes into step 3

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VAT recovery 3. Partial exemption method

• In step 3, the residual VAT apportioned to
  business supplies must next be apportioned
  between taxable and exempt supplies.
• This apportionment is known as the partial
  exemption method
• If there are no exempt supplies, skip steps 3 and
  4 - all residual VAT apportioned to business
  supplies in step 2 is recoverable.
• The residual VAT apportioned to taxable
  activities is recoverable
• The residual VAT apportioned to exempt activities
  must go into the de-minimis test (step 4) to see
  if it is recoverable or not

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VAT recovery 4. De-minimis test

• The total exempt VAT is
• The VAT which is directly attributed to exempt
  activities (step 1), plus
• The residual VAT apportioned to exempt activities
  (step 3)
• If this exempt VAT is
• Less than 1,875 in a VAT quarter (or 625 for
  monthly VAT returns or 7,500 for the annual
  adjustment), and
• Less than 50 of the total VAT attributed to
  business activities in the VAT quarter
• Then the exempt VAT is recoverable
• If not, it is irrecoverable

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VAT recovery Flow chart
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Annual adjustment

• At the end of the VAT year
• Repeat steps 1 4, using figures for the whole
  VAT year (all four VAT quarters added together)
• Use de-minimis limit of 7,500.
• Any difference from the VAT actually recovered in
  quarters 1 to 4 must be adjusted for in the first
  VAT return on the next VAT year.
• From 1 April 2009 you can also make the annual
  adjustment in the last VAT return of the VAT
  year.
• Note that this adjustment is not an error.

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Methods Business / non-business

• Can use any business / non-business method
  provided it produces a result that is fair and
  reasonable.
• Fair and reasonable means the apportionment
  accurately reflects actual use of the associated
  purchases.
• There is no need to obtain prior approval of the
  method from HMRC.

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Methods Standard B/NB method
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Methods Childrens Society

• VAT incurred in generating unrestricted donations
  
• What matters is how those donations are used
• Used to support the general (residual) activities
  of the charity, the VAT on the fundraising costs
  is residual
• Wholly used to subsidise taxable supplies the
  VAT is recoverable in full
• Wholly used to subsidise exempt supplies the
  VAT is irrecoverable (unless exempt input VAT is
  de-minimis)
• Wholly used to subsidise non-business activities
  such as grant funded activities the VAT is
  irrecoverable

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Methods Passive income

• Passive income negligible VAT bearing residual
  costs incurred to generate
• Omit passive non-business income from the
  standard business / non-business method
• Eg (possibly) bank interest, legacies etc

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Methods Partial exemption method

• A business must use the standard partial
  exemption method unless it agrees a different
  method (a special partial exemption method) with
  HMRC.
• From 1 April 2007 new (or changed) special
  partial exemption methods must be approved in
  writing with a declaration that the method is
  fair and reasonable.

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Methods Standard PE Method
The percentage of residual VAT apportioned to
taxable activity is rounded up to the nearest
whole percent.
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Methods Standard PE Method

• Exclude from turnover figures
• Incidental one off transactions eg sale of fixed
  assets
• Supplies from foreign branches (must have their
  own separate calculation)
• From 1 April 2009 can use previous annual
  adjustment percentage on a provisional basis
  throughout year

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Methods Special PE methods

• Staff FTE
• Staff time
• Staff cost
• Floor area
• Directly attributable expenditure

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Accounting systems VAT codes

• Most common approach is VAT codes
• Every transaction is assigned a VAT code
• This code determines how the transaction is deal
  with for VAT purposes

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Accounting systems Sage example
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VAT return

• Periodically (usually quarterly) need to report
• VAT charged to customers in the period
• VAT on purchases in the period that is
  recoverable
• The net values of sales and purchases in the
  period
• Certain details about cross-border supplies

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VAT return Cash accounting

• Normally transactions reported on accruals basis
• Under cash accounting scheme transactions
  reported on paid / received basis
• Automatic bad debt relief
• Taxable turnover must be below 1.35m
• No need to apply to HMRC unless owe HMRC money,
  convicted of an offence, penalised for dishonesty
  etc

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VAT return Annual accounting

• Only one annual return submitted
• But must still pay over estimate liability on a
  regular basis
• Taxable turnover must be below 1.35m
• Must apply to HMRC to join

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VAT return Boxes
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Pre-registration VAT

• Can recover VAT on pre-registration goods (eg
  stock) provided
• Still on hand at registration
• Not purchased more than 4/3 years before
• Can recover VAT on pre-registration services
  provided
• Attributable to a taxable supply made after
  registration
• Supplied not more than 6 months before

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Errors

• Adjust in next VAT return if
• The net value of the error is less than the
  greater of 10,000 and 1 of the figure entered
  in box 6 of the VAT return, subject to an overall
  limit of 50,000
• The error does not relate to supplies or
  purchases in a VAT period ending more than 4 /3
  years ago
• If error above limits in (1) must disclose
  details to HMRC

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Capital goods scheme

• Need to adjust initial VAT recovery on expensive
  assets (usually land buildings costing gt250k)
  used for mixed taxable exempt activities
• Adjust over first 10 years of use
• Adjust for changes in percentage of taxable use
• Adjustment made in annual adjustment

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Foreign VAT

• Can only recover UK VAT in the UK VAT return
• Foreign VAT must be recovered directly from the
  foreign tax authorities
• Send receipts with claim
• VAT must be recoverable under that countrys VAT
  rules

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Cross border supplies

• Where buy goods or services from abroad or
• Where sell goods or services to a foreign
  customer
• Rules depend on
• Whether goods or services
• Status of customer
• Location of customer (in EC or outside EC)
• For services, the type of service

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Contact details

• helen_at_sayervincent.co.uk
• thandiwe_at_sayervincent.co.uk
• www.sayervincent.co.uk
• www.hmrc.gov.uk/charities
• VAT notice 701/1 Charities

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