Input Tax Seepage
If you register for VAT you have to pay HMRC the VAT you have charged your customers. This is called output tax. HMRC will repay the VAT on a wide range of costs relating to your business. This is called input tax. You claim your input tax by netting it off one against the output tax on a quarterly return. Failure to reclaim allowable input tax is described as seepage.
One of the most common sources of input tax seepage is making the decision not to register. It is a common fallacy that self-employed people with a small turnover are not entitled to register. If your business has a turnover of more than £82,000 registration is compulsory. Otherwise you have the choice. It's a balancing act but there's a right answer for everyone.
There are just three questions to ask:
Will the output tax I charge out hurt my customers?
Do I make reduced (5% or zero) rate supplies?
How much input tax can I reclaim on my business costs?
If your customers are all VAT registered businesses the chances are that the output tax you charge won't hurt them because they can recover it from HMRC as input tax, but this is not always the case.
If the customers can recover, they won't mind you charging VAT on top of what you charge now. If they can't they might take their trade elsewhere.
Having HMRC repay your input tax means you don't stand the VAT on your costs. This falls out as net profit. If you are not registered you have to stand the additional cost.
If you are better off registered, it's then a matter of whether it's worth submitting a quarterly return to collect the financial advantage.
Partially exempt businesses:
We sympathise with the complexities and administrative burden you have to face.
If you are a bank or insurance company you will have a team of employees as well as advisers to minimise the impact of VAT through a special method of attribution.
For (say) a small medical practice or members' golf club this is not practical. A special method may well result in a better recovery rate, but it is not easy to word, and you have to get it approved by HMRC: not always easy.
We can help in three ways:
Introduction of an appropriate special method, ideally based on an annual calculation, rather than quarterly, and hopefully resulting in improved recovery of input tax
Attracting HMRC approval
Completing your returns
Another important dimension is to ensure you are not charged VAT where there is relief available. This requires an extensive knowledge of what relief is available and whether it can be exploited. We can help.
Most businesses cannot recover the input tax on cars; leasing companies, taxis & driving schools are among the exceptions. This can be legally mitigated but HMRC will not welcome some methods of mitigation. That said we can advise on how to defer the charge on a commercial basis; this won't rattle HMRC's cage.
Taxpayers don't necessarily realise that a number of motoring expenses are subject to full recovery, while the application of the fuel scale charge is a matter where each taxpayer needs to do some arithmetic.
Groups of companies:
Sometimes input tax will fall into a black hole where it cannot be recovered, either because it is not recovered by any of the companies or there is a flaw in the partial exemption method.
In many cases VAT grouping is advantageous, but selecting which companies to group leads to a kaleidoscope of potential results if one or more is partially exempt.
We can advise as to the most tax efficient solution for VAT grouping.