Do you make exempt supplies?
Do you know about Partial exemption?
We have come across a couple of companies and charities in the recent months who have supplying exempt services and products to customers and they have not been applying the partial exemption rules correctly or at all.
Keeping it simple there are 4 categories of VAT:
- Standard rated 20% – Adult Clothing, Manufactured Goods.
- Reduced Rated 5% – Electric Supplies.
- Zero Rated 0% – New house builds
- Exempt Supplies, Insurance, Education.
In a normal standard rate situation, you are able to recover all your vat incurred on expenses through your vat return this is offset against the vat you owe on your sales. This situation is straightforward and most businesses apply the rules with good success.
Where a business makes exempt supplies and standard supplies the amount of vat you can recover can be limited and this depends on the ratio of exempt to standard supplies. We have been finding that businesses have not been applying these rules and recovering vat on all their expenses. If HMRC discover these errors they will expect all the VAT back, plus penalties.
While partial exemption can be complex there is also a tax planning opportunity. HMRC will allow you to develop your own system for recovering vat on expenses, it must be fair and its good practice to inform HMRC of the system you are using, this helps to protect you in the event of an enquiry. It is possible to develop a system which maximizes your recovery rate of vat improving your cash flow and profits and this is where the tax planning comes in.
If you have any questions regarding partial exemption please contact us, if you currently deal with partial exemption and are worried that you are not applying the rules correctly then you can follow the HMRC toolkit.
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