VAT Non Business and Exempt Supplies. Improving VAT Recovery
At the end of March, April or May the VAT year ends. Below are a few suggestions for improving your VAT recovery next year.
Changing Your VAT Recovery Method
If you suffer a restriction in VAT recovery do you understand it and is it still the best method for you.
One of the more common scenarios I come across is organisations using a VAT recovery method that has been handed down from staff member to staff member and which nobody understands. Often these have become fixed. ‘We recover 62.53% because thats what we have always recovered’.
In practice it is rather unlikely that HMRC will ever agree a fixed VAT apportionment and if the reason for restriction is partial exemption, its almost impossible. If you operate such a method you should review it as it’s probably wrong and it will likely be picked up on a VAT inspection. In fact if you can’t answer why the method works as it does then you should review it. If it’s not obvious to you and you complete the calculation then it’s going to be hard to convince HMRC that its still fair and reasonable.
Even permissible VAT apportionement methods also date. They try to give a fair and reasonable reflection of the use to which purchases are put but this changes over time. For example an income based business/non business method may have been fair when an organisation only received a small amount of grant income but may be very unfair if it manages to obtain a large core funding support grant or a big legacy.
All VAT recovery methods are based on direct attribution. Some organisations only have a business/non business restriction to calculate. Others just have a partial exemption restriction. Unfortunately many have both.
If you have to apply both restrictions then for the business/non business calculation you should split your VAT on purchases into business VAT; non business VAT and mixed business/non business VAT.
For the partial exemption calculation split it into taxable; exempt and mixed taxable/exempt.
Very often the mixed use VAT which is apportioned is the same for both the business/non business and partial exemption calculation; but not always.
Let us consider a charity that is mainly non business for VAT purposes and which fundraises by running a shop that it uses to sell donated goods and the odd VAT exempt lottery ticket. How should it treat the VAT it incurs on shop overheads ?
It should apportion this VAT using its partial exemption method to reflect the use of the costs in making taxable and exempt supplies. Quite possibly the standard partial exemption method would not give a fair and reasonable reflection and it will best applying for a special method. But clearly what would be wrong would be to also apply a business/non business apportionment to the shop costs which are only going to be used for business activities. But if the charity used a single overhead/mixed use attribution for its both business/non business and partial exemption calculation this is what they would be doing.
If you have both business and non business activities consider if your residual, mixed use VAT should be the same for both calculations. If it shouldn’t be then consider changing how you attribute VAT and you may be owned a VAT refund.
If you want any advice in improving your VAT recovery then get in touch.