However, some business owners fail to realise that the VAT reporting requirements for different business structures vary and that there are significant reliefs available to them.

Correctly managing and paying your VAT, mitigating against unnecessary liabilities and planning for future VAT expenses are all part of operating an efficient and effective business.

We have split this article into two so you can find the information pertinent to your specific situation:

1. VAT for limited companies
2. VAT for unincorporated businesses (sole traders/partnerships)

Remember, this article is a general overview of VAT and it’s always best to speak to an experienced accountant who can guide you through your VAT liabilities.

VAT for limited companies

A limited company operates as a separate legal entity from its owners, offering distinct advantages and responsibilities under VAT regulations.

These entities must adhere to specific VAT registration criteria, rates, and schemes designed for their business operations.

As a limited company, you must register for VAT if your taxable turnover exceeds the £85,000 threshold set by the Government within any 12-month period.

The registration process involves completing an online application through the HM Revenue and Customs (HMRC) website via the Making Tax Digital for VAT (MTD for VAT) scheme and providing the necessary business details.

Under this scheme, quarterly submitting VAT returns through compatible software and maintaining detailed digital records are necessary requirements.

VAT rates vary, including standard (20 per cent), reduced (5 per cent), and zero rates, depending on the goods or services provided.

• Standard rate (20 per cent): Applies to most goods and services, including electronics, non-essential items, and standard-rated services such as consultancy.
• Reduced rate (5 per cent): Charged on some goods and services, including home energy, children’s car seats, and sanitary hygiene products.
• Zero rate (zero per cent): Applies to essential items like food (excluding meals in restaurants or hot takeaways), books (excluding e-books in some cases), newspapers, and children’s clothing.
• Exempt: Certain goods and services are exempt from VAT, such as education and training, insurance, and some types of healthcare and medical treatment.
• Outside the scope of VAT: These include donations made without receiving anything in return, statutory fees (like the London congestion charge), and goods or services you buy and use outside of the EU.

Limited companies can benefit from specific VAT schemes like the Flat Rate Scheme, simplifying VAT calculations and payments.

The Flat Rate Scheme benefits your business by simplifying the VAT calculation process, allowing you to apply a fixed VAT percentage to your turnover, which can reduce administrative burdens and potentially lower the amount of VAT payable.

Limited companies are required to submit VAT returns, usually quarterly, and make payments to HMRC accordingly. Timeliness is critical, as late submissions or payments can result in penalties.

You can also reclaim VAT on business-related purchases, provided you keep accurate records and receipts to support your claims.

You can effectively get back the full amount of VAT you’ve paid on eligible goods and services, subject to adherence to HMRC guidelines and the provision of valid VAT invoices.

(Limited companies engaged in international trade must navigate additional VAT considerations, particularly when importing or exporting goods and services, requiring careful planning and compliance).

VAT for unincorporated businesses (sole traders/partnerships)

Unincorporated businesses, such as sole traders and partnerships, operate without the legal separation between the business and its owners.

These entities face different VAT obligations and opportunities compared to limited companies.

Like limited companies, unincorporated businesses must register for VAT upon reaching the £85,000 turnover threshold.

The registration process is the same, requiring details about the business to be submitted to HMRC through the MTD for VAT scheme.

Similarly, you’ll need to submit VAT returns each quarter using compatible software and keep detailed digital records.

While subject to the same VAT rates as limited companies, unincorporated businesses may find schemes like the Cash Accounting Scheme more beneficial, allowing VAT payment upon receiving payment from customers, and aiding your cash flow.

In essence, it allows you to pay VAT based on the cash you have actually received, rather than the invoices you’ve issued, so VAT is not paid on sales until the customers have paid your invoices.

Sole traders and partnerships face similar penalties for non-compliance and late payments, so adherence to deadlines is essential.

You can also reclaim VAT on purchases made for business purposes – like limited companies.

However, you must maintain a clear separation between personal and business expenses to ensure accurate reclaiming of VAT – you cannot reclaim VAT on personal items.

Adjustments may be necessary to accurately reflect the business portion of expenses for VAT reclaim purposes.

To sum up, your VAT liabilities are similar to limited companies but:

• You must distinguish between personal and business assets when reclaiming VAT.
• You can apply for the Cash Accounting Scheme to assist with cash flow.
• Your business is linked directly to you, so mistakes and non-compliance are punishable for the individual, rather than the business.

Again, if you require detailed guidance on your VAT obligations it’s always best to speak to a qualified and experienced accountant.

Should you voluntarily register for VAT?

Voluntary VAT registration is when a business chooses to register for VAT before reaching the mandatory £85,000 registration threshold.

You might consider doing this to reclaim VAT on your startup costs and expenses, enhance your business profile by appearing larger and more established, and avoid the sudden requirement to increase prices once you reach the threshold.

By registering early, you can also reclaim VAT on your purchases which can significantly offset your costs.

If you’d like more information on your current or future VAT requirements, or you’d like advice on whether early VAT registration would benefit your business, please get in touch with one of our team.

Please reach out for more information or for help managing your VAT payments.

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The decision you make will impact which tax reliefs you can claim, so you need to know what your options are.

Buying a company car 

When buying or leasing a company car, there are lots of things you need to consider.

If you buy a company car, will you benefit financially?

Or will it result in increased tax obligations?

There are multiple benefits to buying a company car:

• Business-use only – if the company car is used by employees for business-use only, you will not have to pay a Car Benefit In Kind on the vehicle, which decreases the amount of tax owed. Your Car BIK is a fixed fee you must pay annually, but only if the company car becomes privately used. The tax you pay depends on how much value the car is worth to you; this is determined based on factors such as how much it would cost to buy and what fuel it uses (diesel, petrol, or electric)
• Capital Allowances – if you purchase an electric car, you can claim 100 per cent First Year Allowances. You can deduct the cost of the car from your profits before tax during the accounting period in which you purchased the car.
• VAT – you can only claim VAT on an electric car if the car is VAT registered and the vehicle is used strictly for business

However, there are potential drawbacks when buying a company car.

For example, if fuel is included with your company car, you will have to pay Fuel Benefit tax.

The fuel provided for a company car means you take a portion of the flat rate figure, which depends on your vehicle’s CO2 emissions.

Paying the Fuel Benefit tax could further impact your business’ funds, or your employees’ wages if you provide them with the company car.

Leasing a company car

There are two types of leases:

• Operating lease
• Finance lease

An operating lease is where your business will pay a rental payment to the legal owner of an asset, e.g. the car.

All expenses incurred can be offset against your business profits.

A finance lease is where your business is required to treat the lease as if you had bought the vehicle using a loan.

Your business will depreciate the asset over its life and will charge depreciation and interest payments against your business profits.

As the car is being borrowed from someone else, no capital allowances can be claimed.

Vehicles, leased or bought, must also appear on your business accounts as a liability; this can limit the ability to borrow funds if you need investments to grow.

Electric cars

Leasing an electric car means you can deduct the cost of the lease from your taxable profits, in proportion to your business use.

This route allows you to spread the cost, but you do lose significant tax benefit that comes with first-year Capital Allowance.

Leasing an electric car means you avoid the issue of replacing its battery every few years, which can significantly contribute to the cost of your vehicle.

Electric vehicles are also exempt from the vehicle excise duty (VED), so it is currently free to tax them; electric cars will only be taxed VED from April 2025.

However, BIK still applies to electric vehicles, with the rate increasing to two per cent in 2023/24 and a further one per cent for electric vehicles in 2025/26.

The maximum BIK rate will be five per cent for electric vehicles by 2028.

Electric cars are also exempt from congestion charges in London and emission zones in major cities, meaning your business won’t have to pay the fee if they are travelling in and out of cities all the time.

If you would like advice as to whether your business should buy or lease a company car, or if you should switch to an electric company car, please contact us today.

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This marked increase, particularly a 23 per cent rise in VAT enquiries, puts small businesses and entrepreneurs under a new spotlight.  

It’s crucial to understand what this means for you and how you can prepare your business for increased scrutiny.  

Why small businesses need to be cautious 

If you’re running a small business, the recent shift in HMRC’s focus could mean more eyes on your operations.  

Non-compliance isn’t just a risk, it carries real penalties, and you are far more likely to get caught.  

However, even those with good intentions can find themselves in trouble as VAT laws are intricate, and even a small oversight can lead to significant penalties.  

How to prepare your business 

Accurate financial documentation is your first line of defence.  

Next, you should make sure you really understand your VAT obligations.  

This isn’t just about knowing the basics – it’s about grasping the details that apply to your specific business.  

Please, don’t shy away from seeking professional advice.  

Tax professionals aren’t just for the big companies with high turnovers – they’re crucial allies for small businesses too. 

You should be building a culture in your business that values compliance, not as a burden but as a standard practice.  

Remember, HMRC also offers resources to help small businesses.  

Use them. They’re there for a reason. 

Our final thoughts 

In the face of HMRC’s intensified VAT investigations, being prepared and informed isn’t enough.  

You must consult with experts, stay up to date, and make compliance a part of your business ethos.  

An accountant can protect you from unwanted consequences and surprise penalties and costs that lay a serious burden on your business. 

For more information, please contact one of our team members, or visit our website.

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However, VAT does not apply to everything.

Certain products and services are exempt from VAT, meaning that your business won’t need to pay. However, if your business is VAT exempt, you cannot reclaim VAT on any business purchases.

What do you not pay VAT on?

There are a variety of goods and services that are exempt from VAT and not taxable. Some examples include:

• Insurance, finance and credit
• Education and training
• Fundraising events by charities
• Subscriptions to membership organisations
• Selling, leasing, and letting of commercial property – this exemption can be waived

You also do not pay VAT on zero-rated goods or services; however, these are not the same as being VAT exempt.

Goods and services that are zero-rated are taxable by VAT but at a rate of zero per cent.

This may initially sound confusing, however, this differentiation is related to reclaiming VAT on business expenses.

Exempt businesses:

If you only sell or supply VAT exempt goods and services, then your business is exempt. This means that:

• You cannot register for VAT
• You cannot recover any VAT from purchases or expenses

However, your business is not automatically exempt from VAT if you are selling or supplying zero-rated goods and services.

You can apply for a VAT exemption if your business only or mainly sells zero-rated items, but doing so means you are unable to reclaim any VAT from purchases related to your sales.

Partly exempt business:

Some businesses can be partly VAT exempt. This happens when you incur VAT on purchases that relate to exempt supplies.

In most cases, you are unable to reclaim exempt input tax. However, it can be recovered in full if it is below a certain threshold.

If your business supplies both taxable and exempt supplies, it is vital to keep a separate record of your exempt sales. This allows you to show how you have worked out the amount of VAT you want to reclaim.

Ensuring you follow regulations when it comes to VAT is vital to avoid penalties.

If you are unsure of whether your business is VAT exempt, it is best to talk to an accountant.

Get in touch with one of our experts today for help and advice with VAT for your business.

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it’s commonly associated with traditional tour operators, the scheme’s flexibility means it can also be applied in less conventional settings, such as the “rent-to-holiday-let” market.

If you are a landlord or you’re sub-letting a property in the holiday-let market, TOMS could provide some much-needed VAT benefits for your business.

How TOMS works

Before looking at its application for your business, it’s crucial to understand how TOMS works.

The scheme allows businesses to account for VAT on the margin between the cost of purchasing and reselling travel-related services.

This eliminates the need to register for VAT in each EU Member State where the services are consumed.

TOMS typically covers a range of services including accommodation, passenger transport, and even the use of special airport lounges.

Applicability in the rent-to-holiday-let sector

The “rent-to-holiday-let” market involves renting a property and then sub-letting it as a holiday accommodation.

This business model can benefit from TOMS in several ways:

• Simplified VAT process: Managing VAT can be complex, especially when dealing with properties in different jurisdictions. TOMS can simplify this by allowing VAT to be accounted for only on the profit margin.
• Inclusive services: Often, holiday lets offer additional services like airport pickups or guided tours. These can also be included under TOMS, further streamlining the VAT process.
• Package deals: If you’re offering a package that includes not just the accommodation but also other services like transport or excursions, TOMS can be particularly beneficial. It allows you to account for VAT on the entire package rather than each individual component.

Financial benefits

Utilising TOMS can result in financial advantages for your holiday-let business:

• Cost-efficiency: By accounting for VAT only on the margin, you could potentially lower your overall tax liability.
• Cash flow: The scheme can improve cash flow by deferring the point at which VAT needs to be accounted for, giving you more working capital in the interim.
• Competitive pricing: The cost savings can be passed on to customers, making your holiday lets more competitively priced.

While TOMS is not often the first thing that comes to mind in the “rent-to-holiday-let” sector, its benefits are hard to ignore.

From simplifying VAT obligations to offering financial benefits, TOMS can be a valuable tool for individuals and businesses venturing into holiday lets.

As always, it’s advisable to consult an accountant to ensure that TOMS is the right fit for your specific business needs – especially considering the complex nature of the TOMS scheme.

Our accountants are ready to answer your questions on TOMS and any other financial queries you might have. Please get in touch if you require more information.

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However, the idea of registering for VAT often elicits groans and sighs from business owners, given the additional administrative tasks involved.

While it may seem burdensome, there are, in fact, various advantages to registering for VAT that can significantly benefit your business.

Enhanced business credibility

Registering for VAT provides an image of establishment and credibility.

A VAT registration number indicates that your business is earning above the threshold or is expecting to in the future, a signal that can attract more significant clients or customers who prefer to do business with VAT-registered companies.

Businesses must register for VAT if their VAT taxable turnover is more than £85,000.

Reclaim VAT on purchases

Once you are VAT-registered, you can reclaim the VAT paid on goods and services purchased for business use.

This can include VAT paid on raw materials, business equipment and other business-related expenses, effectively reducing your overall costs.

Open doors to business-to-business transactions

Many businesses, particularly larger ones, prefer or even require dealing with VAT-registered suppliers.

Being VAT-registered opens up a broader market for your products or services. This can be particularly crucial if you are looking to expand into sectors where VAT registration is standard.

Voluntary registration

If your turnover is below the VAT threshold (£85,000 as of 2023), you can voluntarily register for VAT.

This option could be beneficial if you are planning for future growth or if you wish to reclaim VAT on start-up costs.

Simplified accounting with VAT

The UK offers various VAT schemes designed to simplify accounting procedures for small businesses.

The Flat Rate Scheme, for example, allows you to pay a fixed rate of VAT to HMRC and keep the difference between what you charge your clients and what you pay to HMRC.

Such schemes can simplify bookkeeping and financial planning.

It is advisable to talk to an accountant if you want advice on what VAT scheme is right for your business.

Easier international business

Being VAT-registered can simplify trading internationally.

For European Union (EU) transactions, it is often easier to handle VAT obligations if your business is already VAT-registered in the UK.

In addition, some countries outside the EU have reciprocal agreements with the UK, making international trade more straightforward.

While the administrative aspect of VAT registration can initially seem daunting, the benefits often outweigh the drawbacks.

Whether it is reclaiming VAT on business expenses or enhancing your business’s credibility, the advantages of VAT registration can significantly contribute to your business growth in the long run.

If you would like additional VAT advice for your business, please get in touch today.

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However, there are several ways to make this process more manageable and cost-effective, streamlining your workflow and increasing your profitability.

Here are five VAT saving tips that could significantly benefit your business.

Choose the right VAT scheme

The UK offers various VAT schemes, each with its own set of rules and benefits.

• Standard VAT accounting: This is the default scheme where you pay VAT on sales and reclaim VAT on purchases every quarter.
• Flat Rate scheme: Simplifies your VAT accounting by applying a fixed flat rate percentage to your turnover. Ideal for businesses with a turnover under £150,000.
• Cash accounting scheme: Allows you to pay VAT only when your customer pays you, which can be beneficial for cash flow. Suitable for businesses with a turnover of up to £1.35 million.
• Annual accounting scheme: You make advance VAT payments based on your last return (or estimates for new businesses), and then reconcile at the end of the year. Suitable for businesses with a turnover of up to £1.35 million.
• Retail schemes: Designed for businesses that sell directly to the public, these schemes simplify the calculation of VAT based on the types of goods sold.
• Margin scheme: Useful for businesses dealing in second-hand goods, antiques, or collectables. You pay VAT only on the margin between the cost of an item and its selling price.

It is always best to consult with your accountant to determine which scheme best suits your business needs.

Reclaim VAT on business expenses

Many small businesses overlook the opportunity to reclaim VAT on eligible business expenses.

These can range from office supplies to fuel costs for business trips.

Ensure you keep all your receipts and consult your accountant to ensure you’re reclaiming all the VAT you’re entitled to.

Understand zero-rated and exempt supplies

Not all goods and services are subject to VAT. Some are zero-rated (i.e., no VAT),  while others are VAT-exempt, like financial services.

Understanding the difference can help you make smarter business decisions.

For example, if you sell both zero-rated and standard-rated products, you could focus more on the zero-rated items to reduce your VAT liability.

Use the capital goods scheme for large purchases

If you’re planning to make a significant investment in capital goods, such as machinery or computer equipment, the Capital Goods Scheme allows you to adjust the VAT reclaimed over a period of years.

This can be particularly beneficial if your business model or VAT rate changes over time.

Regularly review and update your VAT records

Accurate record-keeping is crucial for successful VAT management.

Regularly review your VAT records to ensure they are up-to-date and error-free.

This not only helps you stay compliant but also prepares you for any potential VAT inspections.

Here to help

Managing VAT effectively is crucial for the financial health of your small business.

By choosing the right VAT scheme, reclaiming VAT on business expenses, understanding zero-rated and exempt supplies, utilising the Capital Goods Scheme, and maintaining accurate records, you can save both time and money.

As always, you should consult one of our experienced VAT specialists for tailored advice that meets your specific business needs.

To learn more about reducing your VAT obligations and maximising tax efficiency, please contact one of our experts.

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By gaining clarity, you can make informed decisions, optimise your finances and sidestep potential pitfalls.

When is VAT applicable on commercial properties?

Commercial property ventures can be classified into four categories – ‘standard rated’, ‘zero-rated’, ‘outside the scope’ and ‘exempt’.

Properties under the standard-rated category have a VAT rating of 20 per cent.

Typically, the purchase or lease of commercial properties is exempt from VAT, sparing both the buyer and seller from any VAT obligations.

However, there are exceptions to this, including:

• Newly constructed commercial properties (less than three years old) are classified as standard-rated
• Owners have the flexibility to apply VAT, referred to as ‘opting to tax’, on rental amounts, which then become standard-rated
• Specific commercial refurbishments might also be under the standard-rated VAT category

The decision to ‘Opt to Tax’

Choosing to ‘opt to tax’ your property implies a decision to levy VAT on its rent.

The primary advantage here is the potential recovery of VAT on correlated costs such as repairs, upkeep or professional fees.

However, this might not always appeal to tenants, particularly those who cannot recuperate the VAT.

Transfers of going concern (TOGC)

In certain scenarios, a commercial property transaction can be classified as a TOGC.

If the property being sold is already set up as a rental business (existing tenants or an ongoing lease), and the potential buyer plans to maintain this model, it might be considered a TOGC.

Properties categorised as a TOGC are classified as ‘outside the scope’ of VAT, eliminating any VAT payment. This can be financially advantageous for buyers in such situations.

To be recognised as a TOGC, the buyer should mirror the seller’s VAT status by the date of transfer.

Essentially, if a seller is VAT-registered and has chosen to tax the property, the buyer should follow suit.

It is crucial that this ‘opting to tax’ decision is communicated to HM Revenue & Customs (HMRC) prior to the transfer cut-off.

Seek expert advice

Due to the intricacies of VAT, it is strongly recommended to liaise with accounting specialists.

The ever-evolving landscape of VAT regulations can be challenging, and any oversight could attract hefty fines.

Each transaction stands on its unique merits and calls for tailored accounting guidance. Collaborating with accounting professionals ensures that you are on the right side of the regulations, protects your financial interests and provides insight into upcoming regulatory changes.

Although VAT rules linked with commercial properties might seem overwhelming, by understanding the basics and recognising areas for savings, you can confidently handle VAT nuances.

For more advice on VAT for commercial property investments, get in touch with our expert team for advice.

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However, with a proper understanding of when and how to navigate it, VAT can be seamlessly integrated into a business’s financial strategy.

Here’s a breakdown of the essentials small businesses need to know about VAT, its potential benefits, and some common pitfalls to avoid.

When should a small business register for VAT?

In the UK, if your business’s taxable turnover exceeds the VAT threshold (currently £85,000), you must register for VAT.

This threshold applies to a rolling 12-month period, not just the current financial year. If you anticipate that your turnover will exceed this limit in a single month, you must also register.

However, voluntary registration is possible even if you don’t hit the threshold.

Why might you want to do that? Here are a couple of potential benefits:

• Reclaiming VAT

Once registered, a business can reclaim VAT paid on business-related goods and services.

• Enhancing business profile

Being VAT-registered might give your business a more professional image, especially when dealing with other businesses.

Advantages of the VAT flat rate scheme

The VAT flat rate scheme is a blessing for many small businesses.

Instead of deducting VAT on every individual purchase and sale, businesses simply pay a fixed percentage of their turnover as VAT.

The rates vary depending on the nature of the business.

Benefits of this scheme include:

• Simplicity

Reduces the time spent on accounting and paperwork.

• Predictability

It’s easier to forecast VAT obligations.

However, the scheme might not be beneficial for all. If you incur a lot of VAT on purchases, the traditional method might allow you to reclaim more.

Common issues

Navigating the world of VAT can be tricky, and errors can be costly.

Incorrect VAT rates

With standard, reduced, and zero rates, ensure you’re charging the right amount.

Keeping abreast of any changes in VAT rates is essential.

Late registration

If your turnover exceeds the VAT threshold, register promptly. Delaying can result in penalties.

Missing deadlines

Ensure VAT returns and payments are on time.

Investing in accounting software or hiring a professional can help in tracking these deadlines.

Not keeping proper records

Every invoice, receipt, and financial document must be kept for at least six years. Digital systems can make this process more manageable.

VAT can be a complex topic to get your head around. Get in touch for advice on this for your business.

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As people grapple with economic pressures, this potential rise in taxi fares might discourage many from using them, possibly shaking the income base of these businesses.

Why is this being considered?

Until recently, VAT wasn’t universally added to taxi tariffs.

The obligation to charge VAT on services like ride-hailing only took shape in 2022 with Uber requiring to pay the tax.

Following a 2021 Supreme Court decision, Uber drivers were officially designated as workers. This brought about new tax implications and necessitated modifications in the app’s mechanics.

Post-decision, from March 2022, Uber integrated VAT into its fares. Competing platforms, Bolt and Freenow, mirrored this move.

Subsequently, to ensure a balanced marketplace, Uber has requested that VAT is charged on all taxi services.

How would this impact taxi operators?

For commuters, this could translate to a price increase, potentially up to 20 per cent, in line with the current peak VAT rate.

Taxi services, meanwhile, would confront shifts in their tax strategies, coupled with evolving demands in how they catalogue and declare tax. Taxis would need to adapt to using cloud-based systems for their tax records and abide by the ‘Making Tax Digital for VAT’ system.

Apart from systematising the VAT inclusion in their pricing model, there’s the possibility that VAT is backdated reminiscent of the scenario Uber faced.

The resultant financial implications might be sizable, with operators anxious about mounting arrears to HM Revenue & Customs (HMRC).

What’s the way forward for taxi services?

To adapt to this changing landscape:

• It’s crucial to remain abreast of potential legislative shifts and their rollout timelines
• Seeking expert advice to help streamline payment processes to HMRC

With the support of an accountant, you will be reassured that you are complying with your tax obligations to avoid falling foul of the law.

Need guidance on your VAT obligations? Contact us today.

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