Can we submit monthly VAT returns?
Q. We struggle to pay our quarterly VAT returns on time because we use the VAT money for other business expenses before it becomes due. Would HMRC allow us to complete monthly returns to help our cash flow?
A. Unfortunately not. A business can only submit monthly returns if it expects to regularly receive VAT repayments, e.g. some or all of its income is zero-rated. But as a possible solution, you could join the annual accounting scheme when you will make nine payments on account during the year based on the previous year’s VAT liability.
This creates a winning outcome of having to complete one VAT return a year instead of four, but still making monthly VAT payments to help your cash flow. To qualify for the scheme, your expected taxable sales excluding VAT in the next twelve months must be less than £1.35m.
However, the balancing payment for scheme users is due two months after the end of the accounting year. This payment could be a large and unexpected bill if your business has grown significantly. It is important to ensure that the monthly payments are realistic. You can, and should, ask HMRC to increase them if they are too low.
Should VAT be charged on hotel purchase?
Q. I am buying a hotel and the seller wants to charge VAT even though I am acquiring it as a going concern. His argument is that the hotel has been closed for four months during the winter so it has failed one of the transfer of a going concern (TOGC) conditions for VAT. Is he correct?
A. The seller is thinking of one of the TOGC conditions that must be met in order to avoid a VAT charge, namely that there should not be any significant break in trading before a business is sold. However, that condition does not apply if the break in trading is caused by seasonal factors, as is clearly the case here.
If you are buying a business, it is important to ensure that you are not charged VAT incorrectly by the seller. You can only claim input tax where VAT has been correctly charged in the first place. In some cases HMRC will allow an incorrect claim if they know that the seller has accounted for and paid the output tax on their own return. If your input tax claim is disallowed by HMRC, you must contact the seller for a VAT credit.
Can we claim the VAT on entertaining costs?
Q. My business provides management consultancy services and we have an important delegation of five people arriving in the UK from our main customer in Japan. We intend to treat them to a top sporting event, which will include lavish hospitality as part of a corporate package. There will be five members of staff in attendance to look after them. Can we claim input tax on the package costs?
A. Input tax is usually blocked on the costs of entertaining non-staff, and this block also applies to staff whose role is to look after the guests and ensure they have an enjoyable time. However, you can claim input tax on the costs of entertaining overseas customers, as long as the expenditure relates to, say, a meal and light refreshments supplied during a business meeting. But input tax is still blocked if the entertainment is classed as being excessively lavish. That would certainly be the case with the sporting event, so unfortunately no input tax can be claimed on any of the costs. Be aware that the concession for claiming input tax on moderate entertaining costs only applies to overseas customers. You cannot claim input tax on entertaining other overseas business contacts, such as suppliers or consultants.
Do we charge VAT when we sell taxis?
Q. We run a taxi business and own six cars. We are about to sell two cars to another taxi firm and are not sure whether we should charge VAT on the sale?
A. The answer here is “it depends”. If you purchased the vehicles without being charged VAT, which would be the case with most second-hand vehicles, you will not charge VAT when you sell them. If you make a profit on the sale, which is unlikely with cars because of depreciation, then output tax must be declared on any profit margin that you make. The profit margin is treated as being inclusive of VAT.
However, if you were charged VAT and claimed input tax when you purchased the vehicles, then you must charge 20% VAT when you sell them. It is important to remember that a “profit” in the case of a car sale is not the book profit shown in your annual accounts, i.e. the difference between the written down value and the selling proceeds, but between the actual selling price and original purchase price.