VAT in Practice: An Advanced Guide for Accountants
This guide covers complex VAT issues including partial exemption, the Capital Goods Scheme, domestic reverse charge, VAT groups, and the option to tax — key areas for accountants advising on VAT.
VAT complexity scales with business complexity. Once a business makes exempt supplies, operates in property, receives cross-border services, or works in construction, VAT becomes a significant advisory area. This guide covers the areas that most frequently arise in practice.
Partial Exemption
Businesses making both taxable and exempt supplies cannot recover all input VAT. The standard method recovers input tax in proportion to the value of taxable supplies to total supplies. Where this produces a distorted result — for example in property businesses where values are skewed — a special method can be agreed with HMRC. The de minimis limits (£625 per month on average, and no more than 50% of total input tax) allow full recovery where exempt input tax is small.
The Capital Goods Scheme
The CGS requires ongoing adjustment to initial input tax recovery on high-value capital items: 10 years for land and buildings (costing £250,000+), 5 years for computers and ships. Each year, if the proportion of taxable use changes relative to the initial year, an adjustment — either a clawback or additional recovery — is required. This catches businesses that buy a building for fully taxable use and later let part of it on exempt terms.
Domestic Reverse Charge
The construction services reverse charge (effective March 2021) and the wholesale energy reverse charge require the customer to account for VAT on services received from CIS-registered suppliers. The supplier invoices without VAT; the customer both accounts for output tax and (if fully taxable) recovers it as input tax simultaneously. This shifts the risk of VAT fraud from the revenue to the business that is registered.
Option to Tax
Land and commercial buildings are normally exempt. Exercising an option to tax makes the supply standard rated, allowing recovery of input VAT on costs. This is typically exercised by property developers and investors to recover VAT on construction costs. An option to tax is irrevocable for 20 years and must be notified to HMRC within 30 days.
Bad Debt Relief
Where a customer has not paid after 6 months from the due date, the supplier can reclaim the VAT they have already paid to HMRC. The debt must have been written off in the accounts. This relief is frequently overlooked by businesses with significant overdue debtors.
Further Reading
Study with Learnsignal: Tax CPD for qualified accountants. Browse CPD.
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Learnsignal Education Team
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