Reclaiming VAT, when and how does it work?

TheBigCheese_2

Hi guys

I've been looking and looking on the HMRC website and I can't find the answers to a couple of really basic questions on VAT.

My business will be nearing the VAT limit soon so we will be registering within the next three months or so I would think...

When I fill in a VAT return knowing that I have paid (for example) £5000 in VAT on equipment etc. what happens?

Is it as simple as you get sent a dirty great cheque for the amount you paid in VAT?

Is that amount carried over and deducted from other charges in the next tax year?

When do you see the benefit of reclaiming the VAT?


Reason I am asking is we could really do with investing in the business more and if that money would be available it might be worth registering for VAT before we hit the limit.

Many thanks in advance for your advice!

LittleVoice

You should register when you believe you will reach the threshold - even if you don't think it will actually happen for a few more months.

When you complete your VAT return you tell them how much VAT you have charged and how much you have paid. It is hoped you charge more than you pay.

If you are about to spend capital on VAT-rated goods, I think you should register now because I don't think you can reclaim retrospectively.

You gain from VAT-registration by being able to hold on to VAT paid to you until the time that you need to hand it over to HMRC. You may also gain credibility by appearing to be a larger organisation than you are. However it can have a negative effect on your sales if you sell a lot to private individuals or other small non-VAT registered firms (who cannot reclaim the VAT) rather than other VAT-registered businesses.

TheBigCheese_2

Hi LittleVoice, thanks for the post.

I can see the advantage of keeping hold of the VAT until it has to be paid, always good to have another 17.5% gaining interest, but that doesn't really answer my question unfortunately.

You can reclaim VAT on all business purchases (plant and equiptment) up to three years before registering for VAT as long as you still have them (i.e. not sold on or scrapped). You can also claim VAT back on services (such as bills) up to six months before registering for VAT.

Say I registered for VAT this coming Tuesday...the VAT I have already paid in the previous three years on computers etc. I would now be entitled to claim back - for example £5000 worth.

So what would happen?
Would HMRC send me a cheque for £5000 immediately?

Would it wait until the next VAT quarter and it be knocked off what I would be paying in new VAT charges to our customers?

Would it be refunded to us somehow at the start of the next tax year in April 2009?

Cheers.

mrkbrrws

You would include the pre-registration input VAT on your first VAT Return, so it would either reduce the payment due or increase the repayment due at the end of the first VAT period.

LittleVoice

Have the rules changed? When I registered for VAT (in the last millennium!), I thought I could only claim for what I had spent from the time of registration. (Though that was not what I was expecting at the time I registered.)

JasonLVC

mrkbrrws wrote: »

You would include the pre-registration input VAT on your first VAT Return, so it would either reduce the payment due or increase the repayment due at the end of the first VAT period.

Spot on.

OP - Say you registered from Tuesday 26th August with HMRC. If you opted for qtrly VAT returns, your first return would be due say end of November 2 008 and you'd reclaim all your input tax (VAT on costs on this return LESS any output tax (VAT charged on your sales to customers) from26th August.

1st returns will normally see you reclaim more VAT than you pay over, subsequent returns will likely see you pay more VAT over than reclaim - but that VAT you pay over is aid by your customer not you.

JasonLVC

LittleVoice wrote: »

Have the rules changed? When I registered for VAT (in the last millennium!), I thought I could only claim for what I had spent from the time of registration. (Though that was not what I was expecting at the time I registered.)

You've always been able to reclaim input VAT incurred on 1st registraton - 3 years for goods/stock - provided they are still in use/in stock (so a laptop or a van still in use is okay to reclaim but a brickie who has previously bought and used bricks cannot reclaim the VAT on the bricks he's already used - only on those still on his shelf so to speak. The rules for services are 6 months (such as legals, accountants, etc).

simpywimpy

So how would a hairdresser go on then? Could I claim the VAT on my set up costs (fixtures and fittings and services) - I wouldn't be charging vat on the cost of the service I provide though

LittleVoice

simpywimpy wrote: »

So how would a hairdresser go on then? Could I claim the VAT on my set up costs (fixtures and fittings and services) - I wouldn't be charging vat on the cost of the service I provide though

If you register for VAT you have to charge VAT, that's how it works. (It's either shown separately or included in the price because you have to account for the VAT applicable to the sale.)

(Or were you thinking about charging VAT retrospectively?)

simpywimpy

I was under the impression that hairdressing services were zero rated

JasonLVC

Hairdressing is NOT zero rated - far from it!. It is VATable and if you do register for VAT you'd have to charge VAT on your services.

Most hairdressers operate a kind of tax planning/legalish VAT avoidance known as a 'chair rental' scheme whereby the owner of the salon 'rents' chair space to the stylists who pay the owner (landlord) rent for using the chair and providing facilities like a sink, mirror, etc.

The VAT rate of rent is exempt (so no VAT is charged on rent but no VAT on expenditure is recalimable either) but it doesn't count towards the VAT registration limit so you could have 8 stylistys each paying you £20k per year thus earn £160k on pure rental alone and not need to register for VAT - so your business would be rental of chairs instead of hair dressing so to speak.

The stylists would then keep whatever taking they get from the customers with maybe a small 'service charge you also bill them for, for eletricty, etc (but is another way of getting a small % of their income under the auspices of rent).

That's how more or less all hairdressing salons manage to survive in the marketplace - talk to your accountant and also visit the hairdressers 'association' website (can't remember what it is called though, sorry)