This is a very common question asked by business owners and there is often some confusion around the subject.
In this short blog we are going to cover the key need-to-know info.
If you are not VAT registered.
If you’re unsure if you are VAT registered, the key point is: did you register?
VAT registration isn’t something that can happen by accident or automatically. You have to actually go and register to become VAT registered. Registering for VAT is separate to your self-employment or limited company registration.
Most businesses don’t have to be VAT registered until the taxable turnover is over £85,000 in a 12-month period. That’s why you or your company will not be registered by default.
Presuming you aren’t VAT registered, your position is fairly straightforward .
- You don’t need to care about what is VAT and what isn’t – the cost is the cost.
- You just need to keep your normal business records.
Always get a receipt for everything if you can, but you don’t need to worry about it being a full VAT receipt.
In short, just keep your records and get on with your day!
If you are VAT registered, this is where the requirements are more detailed
When you or your company are VAT registered there are two specific records you need to keep, in addition to the ‘basic rule’ of keeping normal business records:
- The VAT Account. This is a list of VAT you owe and can reclaim. If you use software like Xero or QuickBooks, the software does the VAT calculations so long as you log transactions with VAT on them.
- VAT invoices. You need to provide evidence for you to be able to recover the VAT incurred on your returns.
- Keep the invoices you issue to other businesses for your services and products,
- Also keep any VAT invoices you receive
In short, if you want to recover VAT you’ve incurred, you need to get VAT receipts from your suppliers. The VAT you pay can often be offset against VAT owed – this is known as ‘input tax’.
Note: If your suppliers are not VAT registered, they won’t be able to issue a VAT receipt . That’s because there isn’t any VAT on their charges to you. However, still keep receipts and records from these suppliers as normal.
VAT Receipt Traps
In order to make a valid VAT ‘input tax’ reclaim, there are some important traps to avoid.
HMRC do have the power to allow a VAT reclaim at their discretion. However, from our own experience of sitting in numerous HMRC reviews and tax court cases over the years tells us that in practice, this isn’t always the case.
The key issues tend to be:
- No receipt at all.
- No VAT receipt (you may have just got the cardholder printout for example, with no VAT breakdown).
- No proof that the business you bought from was VAT registered (common with some Amazon suppliers, for example).
- The VAT receipt is not in your business’s name.
- The address of your business is not correct.
You don’t always get a VAT invoice addressed to you. If you do, always make sure your businesses’ name and address are correct. This is particularly easy to get wrong when ordering online.
What if I buy stuff in a retail store?
Retailers have effectively a special exemption where they don’t have to issue VAT invoices unless specifically requested by a customer. If the goods or services supplied total under £250, they can issue a simplified invoices to UK customers, with less detail on.
The simplified invoice will still have their details and a breakdown of the VAT (amongst other details). This is what you will need for your VAT return.
Cool! Where can I find the detailed guidance?
For the detailed requirements about what should be on your own VAT invoices, (and therefore what should be on the ones you receive), check out HM Revenue & Customs guidance notes on the subject.
You can also see HM Revenue & Customs’ approach to using their discretion to allow VAT reclaims in their internal manual here and their ‘statement of practice’.
I’m still confused about VAT registration and invoices
If you’re new to the whole VAT registration thing, or are approaching the VAT threshold for the first time, ask your accountant or book a consultation with us ASAP.
It’s so much better to have information about VAT in advance, rather than suddenly realising you’re about to flip over the threshold and not knowing what to do!
If you don’t have an accountant, or feel you aren’t making the most of VAT options with your current accountant, we’d love a chat about how we can help.