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Frequently Asked Questions

1. What can my turnover be, before I have to register for VAT?
   
   
2. What are the rules for claiming VAT on car expenses?
   
   
3. Can I recover VAT on bad debts?
   
   
4. What details should appear on a VAT invoice?
   
   
5. What VAT can I claim in my business?
   
   
6. Should I charge VAT on goods sold over the Internet?

1. What can my turnover be, before I have to register for VAT?

The requirement to register for VAT is based upon taxable turnover. This includes all sales subject to the full rate of VAT (17.5%), the reduced rate (5%) and the zero-rate. It does not include sales which are exempt from VAT, or those termed outside the scope of VAT (for example, some services provided to overseas customers).

Currently, the registration threshold is £55,000 per 12-month period. It is important to note that in calculating the turnover of a business, this is measured on a rolling 12-month period.

Once the registration threshold has been breached, the business must then become registered with effect from the first day of the second month after the one where the limits were exceeded. For example, if the limits are exceeded in November 2002, the business must become registered with effect from 1 January 2003.

Should the turnover limits be exceeded due to a one-off increase in sales, there is scope for us to obtain Customs' agreement to 'except the business from registration.'

In some cases, VAT registration is beneficial. A business may therefore become VAT registered on a voluntary basis, in order to recover VAT on its expenses, even though its turnover has not exceeded the above limits.

It is worth mentioning that there are penalties for failing to register for VAT at the correct time.

2. What are the rules for claiming VAT on car expenses?

Where a car has business use and any private use and it is run on the business, the business may reclaim the VAT on the fuel costs. Under such circumstances, however, the business is obliged to declare an amount of VAT each VAT period, in respect of each car fuelled by the business. These amounts, known as scale charges, are summarised below:

For petrol cars:

For diesel cars:

Where no private motoring is paid for by the business, the fuel scale charge does not apply. However a taxable person must be able to show this from his business records.

If a vehicle is used for business purposes, VAT on repairs and maintenance can be treated as input tax provided the work done is paid for by the business.

Where an employee of a business uses his or her car for a business purpose, and is paid a mileage allowance, the business may recover the VAT on the motor fuel element of this mileage allowance.

3. Can I recover VAT on bad debts?

You can reclaim the VAT declared upon a sale which became a bad debt. The basic rules of the relief are:

1. The debt must be more than six months old, measured from the later of the invoice date and the date the payment was due;
   
   
2. The debt must have been written off in the day-to-day accounts, and transferred to a separate bad debt account;
   
   
3. You must notify the customer that you are claiming bad debt relief in writing. At this point, the customer is obliged to repay to Customs any VAT claimed on the purchase of the goods to which the bad debt related.
   
   
4. You must have originally correctly declared and paid the VAT subject to the reclaim, to Customs.
   
   
5. Where an invoice is only partially unpaid, the bad debt relief is calculated on the basis that the unpaid portion is inclusive of VAT. Therefore, where the original invoice was subject to the full rate of VAT, the relief available will be calculated as 7/47 of the unpaid balance.

Note - the requirements of point (3), above, are to be withdrawn from 2003. At this time, legislation will instead be introduced to require any VAT registered person to repay to Customs any VAT recovered on an invoice unpaid for over six months from the due date.

4. What details must appear on a VAT invoice?

1. Customs and Excise specify that the following details must appear on a VAT invoice, issued by a VAT registered person (subject to the notes below):

• An identifying number;
• The time of the supply and date of issue of the document;
• The name, address, and registration number of the supplier;
• The name and address of the person to whom the goods or services are supplied;
• The type of supply by reference to certain specified categories, e.g. sale, hire purchase, lease etc.;
• A description sufficient to identify the goods or services supplied;
• For each description the quantity of the goods or extent of the services, the rate of tax and amount payable, excluding tax, expressed in sterling;
• The gross amount payable, excluding tax, expressed in sterling;
• The rate of any cash discount offered;
• Each rate of tax chargeable and the amount of tax chargeable, expressed in sterling, at each rate; and
• The total amount of tax chargeable expressed in sterling.

2. When a tax invoice is issued to a person in another Member State, the prefix "GB" before the registration number and the registration number, including prefix, of the customer (if registered) must also be included.

3. A registered taxable person who is a retailer is not required to provide a tax invoice unless he is requested to do so by a customer who is a taxable person. In the event of such a request and provided that the value of the supply does not exceed £100, and the supply is not to a person in another Member State, the tax invoice need only contain the following particulars:

• The name, address and registration number of the retailer;
• The time of supply;
• A description sufficient to identify the goods or services supplied;
• The total amount payable including tax; and
• The rate of tax in force at the time of the supply.

Zero-rated and exempt supplies must not be included in less detailed tax invoices. Copies of these invoices need not be kept by the supplier.

4. Where the VAT-inclusive amount of a supply of petrol and diesel oil is more than £100, the particulars required on a full tax invoice are modified so that the vehicle registration and not the customer's name and address is shown on the tax invoice. The type of supply and number of gallons/litres need not be shown. Where the VAT-inclusive amount is £100 or less, a less detailed tax invoice may be issued, see point 3, above.

5. Invoices are not required to support claims for input tax in respect of telephone calls, purchases through coin operated machines and car park charges if the cost does not exceed £25.

6. Invoices can be made out to employees for subsistence expenses and petrol.

5. What VAT can I claim in my business?

1. A VAT registered person is entitled, at the end of each tax period, to claim input tax incurred on supplies of goods and services made to him and tax paid on the importation or acquisition of goods. This is dependent upon the goods or services being used or being intended to be used for the purposes of his business, in making taxable supplies.

2. Any claim for input tax must be supported by a valid tax invoice or equivalent document unless Customs direct otherwise. A pro forma invoice will not suffice.

3. However, notwithstanding the general rules above, input tax relating to certain items is specifically non-deductible. The main ones to note are:

• certain motor cars and accessories, unless exclusively for business use;
• Business entertainment;
  
• Purchases under one of the second-hand schemes;
• Domestic accommodation provided to directors or proprietors;
• Goods or services purchased for private use.

A person making only exempt supplies cannot register for VAT purposes and cannot recover any of the VAT on his expenditure. A person who makes both taxable and exempt supplies can recover only part of the input tax and is known as a partly exempt person. The partial exemption regulations govern the recovery of input tax by such a person. Please contact us for further guidance, should you fall into this category.

6. Should I charge VAT on goods sold over the Internet?

In principle, the sale of goods over the Internet is treated no differently than any other type of sale. However, the following points should be borne in mind:

Assuming that the goods are subject to VAT when sold in the UK:

• Sales to UK customers should be subject to VAT;
  
  
• UK business customers will require a VAT invoice;
  
  
• Sales to private individuals in other EU member states should be subject to UK VAT;
  
  
• Under the right circumstances, substantial sales to private individuals in another EU member state could trigger a liability to become VAT registered elsewhere in that state;
  
  
• Sales to business customers in other EU member states may be zero rated, provided that the customer's valid EU VAT registration number appears upon the VAT invoice and that you have proof that the goods were removed from the UK to another member state.
  
  
• Sales to any customer outside the EU will not be subject to VAT, provided that suitable evidence of export of the goods, from the EU, is held.
  
  
• Where services are supplied over the Internet, special rules apply, according to the nature of the services. We therefore recommend you seek advice at the outset of any such supply.

For more information email Colin Woodward

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