VAT Tips for Your New Business

Services (eg telephone, software or consultancy) claim vat on any invoices dated within the last 6 months
Stock in hand (eg stationery or building materials) Claim vat on the invoices of any stock in hand at the date of registration
Capital items (eg motor vehicles, furniture or equipment) Claim vat on any invoices dated within the last 4 years
Where spending > £250k under capital goods scheme for Land & buildings or civil engineering work Claim vat on any invoices dated within the last 10 years
Where spending > £50,000 under the capital goods scheme for IT equipment, ships or aircraft Claim vat on any invoices dated within the last 5 years

In many cases this may not be a problem, but consider a situation where you are setting up some new premises and therefore pay a builder to fit them out for you.  If he separately identifies the capital expenses incurred then you will be able to claim the vat on those expenses up to 4 years later without any difficulty.  However, if he were to invoice you for all building works without separately identifying the assets, then the whole amount will be treated as services and no vat can be reclaimed once 6 months has passed.

Please note that when you are claiming vat on pre-registration items of capital, the Revenue have stated that you must split the vat based on its vatable and non vatable use.  So for instance if you buy a van prior to registration  and you register for vat one year later – and  say the estimated life of the van is six years, then you will have used the van for non vatable uses for 1/6 years and for vatable uses for 5/6 years.  If the van cost say £20,000 incl vat, then the vat on the van will be £3,333.33 but only 5/6ths of this can be reclaimed ie £2,777.78

You can only reclaim vat on pre-registration expenses where you are using the standard method of vat, none can be reclaimed if you are using the flat rate scheme.  However the flat rate scheme can be very beneficial for small businesses, especially where they do not incur a lot of vatable expenses but do have vatable sales.  It is important that you register for the flat rate scheme at the same time as your register for vat for the first time to be sure to take advantage of the 1% reduction in the flat rate in the first year of registration.

Where the business type is not expressly mentioned in the flat rate list, you should use the rate that most closely represents the business.  Where there are several that could fit the business, you are entitled to choose the rate that would give you the best results.  For instance the rate for an accountant is 14.5%, for a Management consultant is 14% and for other consultants is 12%.  So if the business was for a tax consultant, then provided the supplier does not fit the definition of an accountant, they can choose to register with the lower rate of 12%.  If the business is trading as a company however, you should be careful to insure that the SIC codes used to tell Companies House what the business is match the business type used for the flat rate scheme.

As a new business, it is important that you have considered your responsibility to register for vat, and if you don’t think that is necessary at first, you should ensure that you know what circumstances would result in you needing to register. The registration limits change each tax year, but they are always based on the invoiced sales of the business during the previous 12 months.  You should therefore be able to check the value of invoices raised within the last 12 months at any point, not just at your accounts year end.  NB if you have decided to use cash accounting, you should still be able to check the value of invoices raised, since the registration threshold is based on invoices issued and not sales received.

One final thing to keep in mind is that registration for vat is based on the person registering, not the business.  So if you are a sole trader, you may need to consider what other income you are receiving such as ebay sales, AirBnB or furnished holiday let income.  If you register for your sole trade business, you may inadvertently have to charge vat on the sales for these other sources of income too.  You should also take their value into account when reviewing registration or de-registration thresholds.