As a bit of background - I set up my bookkeeping practice in January and have got 3 clients so far. I studied via the AAT route but jumped ship to ICB to obtain a practicing licence.
My dilemma is one of my clients who is an IFA. He is VAT registered but the majority of his sales are VAT exempt - I would say 90% exempt to 10% VATable. I have read up on the partial exemption rules on the HMRC website - including the updated de minimis rules. From this - my understanding is that he can't claim input VAT on his purchases - or at least very little. For example - for the quarter I'm working on all of his turnover relates to exempt sales. His input VAT is only c£450 for the quarter - ie it is under de minimis - but I don't think he can claim anything as he doesn't meet the 50/50 part of the de minimis rule. Is my understanding correct?
I'm questioning myself as from previous VAT returns it appears that the old bookkeeper claimed back all input VAT - even when there wasn't any output VAT. Also - this has never been queried by the accountant at year end. Being new to all this - I'm assuming that they are right and I am wrong - but I'm not sure I understand why and think I must be missing something obvious!!
Sorry this is a bit long winded but hopefully someone can help me!!
I had to deal with this for the first time last VAT quarter with one of my clients. You need to work out the following:-
1. Work out how much input tax relates to your taxable sales. (You can claim this back) 2. Work out how much input tax relates to your exempt sales. (You cannot claim any of this back)
3. Work out how much input tax relates to both your taxable and exempt sales. (You can claim some of this back based on the taxable percentage).
You calculate the taxable percentage by dividing your exempt sales by your total sales. This percentage is then applied to the amount at 3. This is the amount of "residual" input tax you can recover. You then add this to the amount at 1. and this is the total input tax you can reclaim.
You then need to apply the de-minimus test. If your exempt input tax is not more than £625 per month, or £1,875 per quarter and your exempt input tax is not more than 50% of your total input tax in that quarter then you can reclaim all your input tax.
It's very complicated! Took me a while to get my head round it.
Pauline has given a good explanation about Partial Exemption. And you are right to claim only a proportion of VAT as input tax.
But, with a low proportion of taxable outputs, you may wish to consider whether to deregister for VAT. The limit (£79,000) refers only to taxable turnover, not total turnover.
Just to clarify - this quarter, with there being no output VAT at all - they can't claim any input VAT - as all of their purchases must have related to exempt sales.
In the past - there have been quarters where there has been no output VAT but input VAT has been claimed. Can you envisage any circumstances where this may happen or is it likely to have been an error? I am going to have to go back to him to let him know that there are going to be very few occasions when he can claim VAT back and so I want to be sure of my facts as he seems to be under the impression that he can claim all VAT back.
I agree - there is little point in them being VAT registered at all on this basis. I think I will suggest they de-register.
If there is no output VAT in a quarter, it is conceivable that some VAT incurred relates to vatable income in other quarters. If not, as you suggest, you will not recover any VAT.
You should note that you are also required to carry out an Annual Adjustment. This is a Partial Exemption calculation to cover the whole year to March/April/May, depending on the VAT Return stagger. Any difference between the VAT to be claimed for the year, and the VAT that was claimed, needs to be adjusted.
(It seems to me that your fees for working this out will exceed the VAT to be claimed!)
Feel free to ring me for clarification on any point (01480 464133).
