Claiming back VAT

ChristopherM87

Why doesnt everybody claim back VAT? It seems really easy, just register as a sole trader and for VAT, then claim back VAT on all your purchases. I know you have to use your purchases for business purposes, but you can mix (90% personal use, 10% business) and still claim 2% VAT back!

JasonLVC

ChristopherM87 wrote: »

Why doesnt everybody claim back VAT? It seems really easy, just register as a sole trader and for VAT, then claim back VAT on all your purchases. I know you have to use your purchases for business purposes, but you can mix (90% personal use, 10% business) and still claim 2% VAT back!

I'm not sure if your post is a statement on how to commit VAT fraud or to help genuine business users.

You do have to actually make sales with VAT on too, if you do not make any sales with VAT on, HMRC will deregister you on the basis you are not a taxable business and demand all the VAT reclaimed on purchases back. HMRC can do this at any time during your registration and for years after you have de-registered.

So if you are charging VAT to your customers you'll be adding 20% to whatever your sale price is and your competitor who isn't VAT registered is instantly 20% cheaper than you and your customers will leave you unless you offer a unique offering.

You can reclaim VAT on goods purchased by the business for a business purpose, so if you want to reclaim the VAT on a 50" plasma or laptop then you have to have a business reason for it. A blanket 10% business use method is not sufficient alone to justify VAT recovery on everything you buy and if the sole trader operates from home, the level of evidence to prove business use will increase greatly. So you may be able to argue things like a computer or iPad but it'll be harder to justify a boat or bed unless the business is in that trade sector.

The tribunals regularly see people who register for VAT, buy an PC and an iPad, reclaim the VAT and then try and deregister or argue they are "in business", they generally lose. They are then subject to penalties of upto 70% of the VAT claimed plus interest. So it is not without risk and to register for VAT you must provide your home address details, your NI numberand previous addresses so HMRC know who you are.

That's not to say there is no oportunity for fraud here, but the reality is that to get away with it, you actually need to understand the VAT system really well to avoid the obstacles that would catch the less organised out.

podperson

Because then you have to charge VAT to your customers and pay that to hmrc. Or do you mean just say you're a sole trader when you aren't actually trading? In which case I think the tax office might realise when you don't have any accounts or pay any tax/NI. It also needs to be viable that you bought/use the item you're claiming VAT on for the business.

ChristopherM87

JasonLVC wrote: »

You do have to actually make sales with VAT on too, if you do not make any sales with VAT on, HMRC will deregister you on the basis you are not in business and demand all the VAT reclaimed on purchases back. HMRC can do this at any time during your registration and for years after you have de-registered.

If I am a sole trader starting a web hosting business and use my own savings to pay for datacenter equipment and dont make sales within the first few months how do I prove I am not committing fraud?

JasonLVC

ChristopherM87 wrote: »

If I am a sole trader starting a business and use my own savings to pay to start up and dont make sales within the first few months how do I prove I am not committing fraud?

When registering for VAT you are asked if you are already trading or intending to trade.

If you tick you are intending to trade, HMRC will not issue a VAT number until you provide copies of bank statements, budget, potential list of customers, contracts with suppliers, etc and this will prove to HMRC you are in business. If you do not supply this you do not get a VAT number, simple as that.

If you tick you are already trading, they would expect to see sales on your first VAT return. HMRC always verify the first (and sometimes the second) VAT return. So when you submit your first return with no sales and recovery of purchase VAT, they will ask to see a copy of each purchase invoice you claimed VAT on (they do this everytime on the initial returns).

If the invoices are for a PC or something businesslike then they'll likely release the refund no questions asked, but after 2-3 VAT returns with no sales reported HMRC may then automatically de-register you and seek repayment of previously paid VAT on the basis the original registration was invalid.

The genuine business start-up can get caught up in this checking process and the process has got harder in recent years as HMRC crack down on fraudulent applications.

ChristopherM87

JasonLVC wrote: »

The genuine business start-up can get caught up in this checking process and the process has got harder in recent years as HMRC crack down on fraudulent applications.

So lets say I start a web hosting company and buy some server equipment. I start by selling web hosting packages for family and friends. Is that in business?

heretolearn_2

Yes, it makes no difference who you are selling to - but you need to be a genuine business. Having a tiny turnover, not making a profit etc and you are clearly not actually in business, you'll flag up very clearly as someone up to something. And in this case, a VAT scam.

VAT is a business thing. As a non business individual, no, you can't start trying to pretend you are and claim back VAT on all sorts of expenditure. Well, you can, but live the rest of your life worrying about being prosecuted for it.

ChristopherM87

By "sell" do I have to make a profit? Ie running web hosting for non-profit or a loss, can I still claim back VAT?

InsideInsurance

It can be run not for profit but do the maths, if you are buying and selling at the same price then there is 0 net VAT because you claim back exactly the same as what you have to pay.

The only times VAT is beneficial (when your not committing fraud) is when you are selling to businesses that are also VAT registered so they don't care, if your end product/ service is zero rated or the flat rate scheme if your costs are very low.

To all B2C businesses VAT registration is evidently something bad.

If you want to commit fraud/ crimes then VAT fraud probably isnt the most profitable either

ChristopherM87

If I by a server for £1000+VAT and sell free web hosting (and just make earnings on adverts for example), I still can claim back the VAT though?

Mistral001

ChristopherM87 wrote: »

By "sell" do I have to make a profit? Ie running web hosting for non-profit or a loss, can I still claim back VAT?

You could do worse if you just looked up the difinition of "trading" in the dictionary. I have often have had to answer the question "when did you start trading" since I set up my business 15 years ago. I know the exact date. it was when I first stepped into a prospective client's office and offered my services. I did not get my first job for weeks after that and did not get paid for months.

It is all about what YOU DO as a person who trades when you are a sole-trader. So when did you first offer your services to the public? If you are advertising only via your own website then that might not necessarily be the day the website went online.