Partial Exemption VAT

Do you provide a mixture of supplies where the VAT treatment of each is different?

Where a business makes both taxable and exempt supplies then it has to calculate how much VAT it is entitled to recover on business expenditure – this is done by way of a partial exemption calculation.

Here is a list of -> Exempt Supplies

Where a business makes fully taxable (VATable) supplies it can register for VAT and can recover in full any VAT that it incurs in the course of making those taxable supplies.

Where a business makes fully exempt supplies it is not entitled to register and so has no ability to recover VAT that it incurs in the course of its business.

Partial Exemption Calculations:

Standard method

This is the default method and doesn’t require approval from HMRC for use, and there are 3 stages involved;

1. The total value of income defined as ‘taxable’ is worked out as a proportion of the total income to work out how taxable the business is as a percentage. This percentage is rounded up to the next whole number under this method.
2. The VAT on expenditure is attributed to one of three categories, A = wholly taxable use, B = wholly exempt use, and C = unattributable, or ‘pot’. All of ‘A’ and the taxable percentage of ‘C’ will always be recoverable in full. The remainder is defined as ‘exempt input tax’.
3. The exempt input tax value is compared to the relevant ‘de minimis’ limits. If the comparison shows that the value meets both conditions of the de minimis test then all VAT on expenditure can be recovered in full (the business is deemed to be ‘fully taxable’). If either element of the test is not met then the business is ‘partly exempt’, and only the taxable part is recoverable (being A + % of C as above).

Special method

Where the standard method does not accurately reflect the business structure or sector, and does not produce a ‘fair and reasonable’ result, then it is possible to request that a special method be used instead. This would require HMRC approval, and would use different calculations (for example proportional floor space, employee time, head count) rather than income values. The calculation would still require attribution of VAT on expenditure, and would still be compared to the same de minimis limits.

Standard method override

Where the standard method does not produce a fair and reasonable result it may have to be overridden. This would apply where the amount of input tax recovered “differs substantially” from the actual use for taxable purposes. The definition of substantial is where the difference exceeds

• £50,000 or
• 50% of the ‘pot’ value (C) and £25,000

Examples of situations where this might apply include delayed or abandoned projects where input tax might be recovered in advance, business units using costs to make different supplies, or costs incurred in one year that will not be used until a later year.

Annual adjustments

All methods require an annual adjustment that effectively recasts the values for the longer period and may result in adjustments – either VAT to be paid back or additional VAT to be recovered. There are also some simplifications to the standard method that allow provisional values to apply throughout the year with an annual adjustment at the end, and some simpler calculations that avoid having to carry out a full partial exemption calculation.

Making Tax Digital – MTD

Your options on how to make the quarterly and annual adjustments will depending on the Software you have chosen to file your MTD tax returns with.  Here at Darrall & Co we will do our best to guide you through this.

We’ve been through the mill already – read about this here:

https://www.darrallandcompany.com/making-tax-digital-pilot-test/

Still using Spreadsheets … we have a solution for you:

Making Tax Digital – Bridging Software

Click here to contact us for Help !

Read the Post on LinkedIn

Today I filed my company VAT return as part of the MTD Pilot and have decided to report my findings to you. I used TaxCalc VAT filer which was simple and effective.

This process was not without some degree of pain due to issues arising from the HMRC VAT/MTD system. This involved multiple phone calls and emails over the last few months that get acknowledged but never actioned. It is very difficult to get through to any HMRC representative that understands what is going to happen when the switch over happens and even harder to get help on the Pilot. I still have unanswered questions.

It also did not help that the original Software that I tried to use, which bills itself as “MTD Ready” was unable to submit under MTD. Yes they are one of the Big Players and yes they are HMRC Recognised (https://lnkd.in/ga68Sk6). Even more surprising is that they have stated to me that they have no intention to provide MTD services for businesses that are not mandated to do so. Therefore if your turnover is less than £85,000 per year and you volunteer for MTD you will be disappointed in the near future.

If you need help – I’m only a phone call away!

Click here for Contact Us Details

Buying and renovating a property

Will you get tax relief for say £50k of repairs that you are planning to do at the new premises that you have recently acquired with a view to renting it out.

The following link details HMRC’s opinion https://www.gov.uk/renting-out-a-property/paying-tax

Allowable expenses do not include ‘capital expenditure’ – like buying a property or renovating it beyond repairs for wear and tear.

• If the expenditure is “Capital” it gets added to the cost of the property and you get tax relief when you sell.
• If the expenditure is “Revenue” you get tax relief against income.

Deciding if the repairs represent a Revenue cost :

Click here to read the full HMRC guidance   The relevant part is duplicated here:

Repairs to reinstate a worn or dilapidated asset are usually deductible as revenue expenditure. The mere fact that the customer bought the asset not long before the repairs are made does not in itself make the repair a capital expense. But a change of ownership combined with one or more additional factors may mean the expenditure is capital. Examples of such factors are:

A property acquired that wasn’t in a fit state for use in the business until the repairs had been carried out or that couldn’t continue to be let without repairs being made shortly after acquisition.

The price paid for the property was substantially reduced because of its dilapidated state. A deduction isn’t denied where the purchase price merely reflects the reduced value of the asset due to normal wear and tear (for example, between normal exterior painting cycles). This is so even if the customer makes the repairs just after they acquire the asset.

The customer makes an agreement that commits them to reinstate the property to a good state of repair. For example, Fred is granted a 21-year lease of a property in a poor state of repair by his landlord that he, in turn, sublets. When Fred’s landlord grants him the lease Fred agrees that he will refurbish the property. Fred’s expenditure on making good will be capital expenditure and not allowable. But Fred’s landlord may be chargeable on the value of the work under the premiums rules (PIM1200 onwards) and Fred may qualify for some relief (see PIM2230 onwards).

My loose interpretation if the fully renovated property is worth say:

• Value: £450k and you pay £330k being – £280k (for the premises) + £50k (repairs) which combined make it worth £450k, then the £50k is most likely capital.
• Value: £310k and the £330k spent puts it into a liveable state without actually improving the property (i.e. without making it worth more that £310k) then there is probably a fair degree of repair included in the £50k.

This is an area which can involve a lot of work.  My advice is to ensure that the builder provides a full costed itinerary of the works that they are undertaking and makes it as clear as possible such that the above question of “is it capital or revenue” is very easy to interpret.  This would also present a strong argument to HMRC if they were to ever challenge the costs.

I hope that you have found this interesting and that some of the links prove to be of help.  If you however you would like some structured advice then please be sure to get in touch:

https://www.darrallandcompany.com/contact-us/

This blog came about as part of an exercise looking into Stamp Duty.  Feel free to click here to read it. https://www.darrallandcompany.com/stamp-duty-land-tax-sdlt

There is much that can be said about Stamp Duty Land Tax and I do not intend to try and cover all potential aspects of this in a humble blog.

This blog covers a few issues that I was looking into recently in respect of residential properties:

Key:

SDLT = Stamp Duty Land Tax

BTL = Buy to Let

HMRC – H M Revenue & Customs

Italics = Direct download from the listed webpage/link

Buying Flats in one premises that might be considered to be multiple properties:

Unless the Flats have entirely separate access points (e.g. no shared front door) they are likely to be regarded as one premises for SDLT purposes.  e.g. Two flats bought together costing say £280,000 would most likely not be regarded as two separate properties of £140,000 (which would otherwise reduce the overall charge to SDLT).

Click to read HMRC Manual which gives a fuller explanation

How much stamp duty might be due?

This is a useful link where you can run various scenarios, including if the property is not your only one.

If it’s not your only property chances are you will pay an additional charge.

Click through to a stamp duty calculator

Buying through a company – does it avoid the additional charge?

If you have one property already, will buying your second through a company remove the additional charge?

This article confirms a company also pays the additional charge  https://www.gov.uk/guidance/stamp-duty-land-tax-corporate-bodies

Companies must pay the higher rates for any residential property they buy if:

• the property is £40,000 or more
• the interest they buy is not subject to a lease which has more than 21 years left

If the property costs more than £500,000, the 15% higher threshold SDLT rate for corporate bodies may apply instead.”

I hope that you have found this interesting and that some of the links prove to be of help.  If you however you would like some structured advice then please be sure to get in touch:

https://www.darrallandcompany.com/contact-us/

Please also feel free to read the related blog on buying and renovating property

(Nb – this blog will not be active until after 1st December 2018)