VALUE ADDED TAX (VAT)
What is VAT?
VAT is known as an Indirect Tax as it adds tax not to earned income or profit, but to the value of a supply made in the context of a business activity.
Businesses need to become familiar with new VAT regimes and processes post Brexit. Importers and exporters have other VAT accounting changes to on-board into their systems as well.
Whilst VAT is a tax regime that applies to supplies of goods and services undertaken by way of business here in the UK this does not mean that the Not-for Profit (NFP) sector can ignore VAT. There are limited VAT reliefs available to the NFP sector and VAT rules will vary between businesses and bodies such as local authorities, government departments and NHS Trusts which all adds the need to be proactive in managing your organisation’s VAT affairs.
VAT Impact On Activities
- Taxable – either at the Zero, Reduced or Standard VAT rate or,
- Exempt – no VAT is chargeable as the supply is exempt from VAT
Establishing what business supplies you make, and the VAT treatment of those supplies, will determine whether you should be VAT registered in the UK and the VAT you need to charge. It will also determine what VAT can be offset and recovered from HMRC.
Businesses that make a mixture of Taxable and VAT Exempt supplies will need to devise methods to allocate their costs to each area as VAT can only be recovered where it relates to supporting taxable business income, hence the complexities of VAT management start to arise.
Establishing The Correct VAT Rate To Apply
There is a range of UK VAT legislation which assists in determining how a supply of goods or services will be treated for VAT purposes, primarily the VAT ACT 1994 but other Regulations and Statutory Instruments need to be considered, especially as VAT is often an area where changes regularly occur.
As with all legislation it is open to interpretation by both HMRC and the taxpayer in their turn. HMRC also publish Business Briefs and Public Notices to inform their approach to sectors, issues and the like.
Why Is VAT So Complex?
VAT has moved over the decades from what was envisaged as a “simple tax” – a tax rate added to the price of goods and services, paid by the customer, and passed on to HMRC through a VAT Return which also allowed the VAT registered taxpayer to recover VAT costs they had incurred.
Many sectors are VAT sensitive – in that they are VAT registered but unable to recover much of the Input Tax they incur – Universities, Colleges, Charities, Healthcare, Housing Associations, Finance, Insurance and Property businesses are just a few examples.
Even in more “straightforward” sectors, methods to agree VAT recovery processes are needed. VAT decisions over property developments, disputes with HMRC, compliance for Making VAT Digital, importing and exporting goods and services, and cashflow management – all these come into the everyday world of proactive VAT management.
If VAT gets complicated for your business, Xeinadin has a team of dedicated VAT specialists to assist you.