You will have read elsewhere that VAT
applies at 17½% to most supplies of goods and services. That is
true. However, there are a significant number of areas where other
rates of VAT apply. Let me assure you – it is in your interest to
get it right. It is not always easy to untangle things later!
Example: a camping and
caravan site charged VAT at 17.5% on its
residential lettings. HMRC advised that this should be exempt. The
site decided to amend the past three years Returns on this basis. He
prepared a claim exceeding £40,000. HMRC said, “You can’t have the
money back, because you won’t pass it back to your customers.”
Marks & Spencers had a similar
problem with their teacakes!
The basic position is that all
supplies of goods and services are standard rated, that is 17.5%.
The other alternatives fall into
Sch 7A – Reduced Rate
Sch 8 – Zero Rate
Sch 9 – Exempt
The lines between the three
schedules are sometimes quite fine. For example, transactions in
relation to property can fall into any of the three, or be standard
rated. If you are not sure, you can ring the HMRC National Advice
Service. They will give you an answer, and a call reference number.
But they will not provide advice on minimising the VAT cost of a
transaction. It is always better to seek advice before making your
transaction. Once the goods or services are supplied, it can be
difficult to put right an error.
If your sales are B2B, and you make
a VAT error, it is generally easier to put things right. If you
undercharged VAT, send a VAT-only invoice to the customers, with a
covering letter, telling him that the VAT can be recovered subject
to the normal rules. If you overcharged VAT, send a VAT-only credit
note, and a cheque.
Beware: to make and have to
adjust an error can appear unprofessional. Use the opportunity to
comment on the complexity of VAT, and your readiness to put right
The distinction between exempt and
taxable sales is also important. Something is taxable if it is
standard, reduced, or zero rated. Something is exempt if it is
There are two important
first, a person cannot be
registered for VAT if he only makes exempt sales, unless he is
registered as part of a VAT Group;
second, where a person makes
exempt and taxable sales, he can only recover a proportion of
his input tax on his costs. Essentially, he can only recover
input tax in relation to the taxable sales he makes.
Example: a property developer
sells two houses, one he built himself, which is taxable; the other
he purchased and renovated, which is exempt. He can recover input
tax on the first, one materials, professional fees, etc. He cannot
recover that input tax in relation to the second.
Lots of businesses make some exempt
sales. Common examples are commissions on insurance, financial
products, lottery tickets. In each case, a calculation is required
to be carried out for each VAT Period. Where the income is small, no
adjustment will be required.