For those of you left feeling a little underwhelmed by the 2.5% reduction in VAT, we offer advice on further VAT reductions and refunds.
Most businesses in the financial sector can recover only part of the VAT on their costs, so the Chancellor's announcement of a 2.5% reduction in the standard rate will have been welcome - although perhaps scant consolation for the grim economic outlook. If the reduction left you feeling a little underwhelmed, you should consider whether there are other reductions or refunds you could claim from HM Revenue & Customs. We have set out some suggestions to get you started.
Review Your Partial Exemption Method
Take a fresh look at your partial exemption method. Is it producing a good result, or does it need an update? Would you benefit from splitting the recovery calculation between the different areas of your business?
Reclaim More Of Your Input VAT
You probably know that input VAT is recoverable where it relates to making taxable supplies. 'Taxable' includes zero-rated transactions (e.g. in respect of the commodities markets). You might also know that it is recoverable when you make supplies outside the UK, if they would have been taxable here.
Did you also know that you could recover VAT on the costs of making exempt supplies, when the transaction is regarded as taking place outside the European Union (EU)? If so, do you know all of the rules for determining which transactions are considered to be non-EU? The obvious example is where your client is outside the EU, so if all of your services happen to be supplied to a hedge fund in the Cayman Islands you can recover your input VAT in full. However, if that is only part of your business you need to ensure that your partial exemption method provides for some of the input tax to be allocated and recovered accordingly.
Many businesses forget that a transaction also counts as non-EU if you're an intermediary (e.g. a broker) acting for a UK/EU client who is selling to a non-EU buyer. If you haven't been counting such transactions in your partial exemption calculation you may be able to submit a backdated claim.
Dealing With Reverse Charges
All businesses need to monitor 'reverse charge' services that they receive from overseas suppliers – not least because that is one of the first things that the VAT officer will look for when he/she comes to visit. Most businesses make the effort to track them and account for VAT under the reverse charge rules, but many are actually paying too much. Not all services are liable to the reverse charge. Some are exempt; some might have been paid for by your UK office but not actually received in the UK; others might be reverse chargeable but directly attributable to a taxable (or non-EU) activity and so be fully recoverable; and quite a few, on closer examination, turn out to be movements of money between group members that have nothing to do with supplies of services.
If you're not sure you're paying and recovering the right amounts of VAT, get in touch with one of our VAT specialists. The Smith & Williamson VAT team are experts at reducing the cost of VAT to our clients' businesses, not by selling you 'schemes' but by knowing what can be done.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.