Category: Value Added Tax

VAT if you sell your business

When selling a business, the Transfer of a Business as a Going Concern (TOGC) rules can allow the transaction to be VAT-free if key conditions are met. This prevents unnecessary VAT charges and ensures compliance with HMRC. Learn how TOGC applies to your sale.

A TOGC is defined as "neither a supply of goods nor a supply of services” meaning it falls outside the scope of VAT and no VAT would be charged on the sale.

For the TOGC rules to apply, all of the following conditions must be satisfied:

• The assets must be sold as part of a business that is operating as a "going concern." This means the business must be actively running, not just an 'inert aggregation of assets'.
• The purchaser must intend to use the assets to carry on the same type of business as the seller.
• If the seller is a taxable person, the purchaser must either already be a taxable person or become one as a result of the transfer.
• If only part of the business is sold, it must be capable of operating independently.
• There must not be a series of immediately consecutive transfers.
• Additional conditions apply to transactions involving land.

The TOGC rules can be complex, and both the seller and buyer need to ensure they comply with all the conditions. These rules are mandatory, so it's crucial to establish whether a sale qualifies as a TOGC from the outset. For example, if VAT is charged incorrectly, the buyer cannot recover it from HMRC and would need to seek reimbursement from the seller.

How VAT Payments on Account Work

Businesses owing over £2.3 million in VAT annually must make advance payments on account. These are based on the previous year’s VAT liability and paid in instalments. Late payments incur penalties, but adjustments may be possible for fluctuating liabilities.

The payments are usually based on the previous year’s VAT liability, and businesses are required to pay 1/24th of their estimated annual liability to HMRC by the last working day of the second and third months of the VAT quarter.

For example, if your VAT quarter ends on 31 March, your payments on account for that quarter will be due by 31 May and 30 June. Businesses that fail to make these payments on time will be subject to interest and penalties.

The payments on account and the balancing payments must be made electronically and cleared funds must be in HMRC's bank account by close of business on the due date. Businesses making POA do not benefit from the seven extra calendar days allowed to other VAT registered businesses for paying electronically.

The payment amount is calculated by HMRC based on the previous year’s VAT liability. If your liability changes and fluctuates by more than 20%, you may be able to request an adjustment to reduce your payments. This request must be approved by HMRC, and any adjustments will only be applied once HMRC has confirmed that the changes are valid. If the amount of VAT payable is higher than anticipated, the payment on account may increase, but it cannot exceed your total VAT liability from the previous year.

VAT and the goods you use in your own business

Using business goods instead of selling them is usually VAT-free, but some cases require VAT payments. These "taxable self-supplies" include cars taken from stock and certain buildings. Read on to see how to stay compliant.

If your business makes products or buys and sells them, you might end up using some goods in your own business instead of selling them.

Usually, you do not have to pay VAT on goods used this way, because you are not actually making a VAT taxable supply. However, there are some exceptions. These exceptions are called “taxable self-supplies.” You will need to keep track of these goods you use in your business for VAT purposes.

Self-Supply of Cars

If you are a motor manufacturer or dealer and take a car from your stock for your own use, that is a taxable self-supply. In this case, you will need to pay VAT on the car.

Other Taxable Self-Supplies

There are some other situations where goods you use in your business are treated as taxable self-supplies. These include:

• Certain non-domestic buildings you build or extend using your own labour.
• Cars on which you reclaimed VAT because they were meant for use as a taxi, hire car, or driving school car, but you actually used them for a non-qualifying purpose.

Selling Goods Bought for Your Business

If you buy something for the business but later sell it to a customer (even if it’s to one of your employees), you will need to charge VAT on the sale price.

What’s included in your VAT return

With a £90,000 VAT registration threshold, many UK businesses might wonder whether to register voluntarily. Understanding how to balance output and input VAT can help optimise cash flow and avoid costly mistakes with HMRC.

The current VAT registration threshold for businesses is £90,000 in taxable turnover. However, businesses below this threshold can still opt for voluntary VAT registration.

VAT registered businesses charge VAT on their sales, known as output VAT, while also paying VAT on most of their purchases, referred to as input VAT.

The output VAT is collected from customers on behalf of HMRC and must be regularly paid over to HMRC. However, businesses can deduct the input VAT on most (but potentially not all) goods and services purchased from their output VAT liability to HMRC.

This calculation usually results in a VAT payment that is due to HMRC. If the input VAT exceeds the output VAT, HMRC will owe you a refund of overpaid VAT.

HMRC’s guidance states that the following must be included on your VAT return:

• your total sales and purchases
• the amount of VAT you owe
• the amount of VAT you can reclaim
• the amount of VAT you’re owed from HMRC (if you’re reclaiming VAT on business expenses)

It's important to include VAT on the full value of your sales, even if:

• You receive goods or services instead of money (e.g., part-exchange)
• You have not charged VAT to the customer (the full price charged is treated as including VAT).

Please note, you cannot charge VAT to your customers or claim back the input tax you have paid to suppliers unless you have formally registered for VAT.

Health services exempt from VAT

Health professionals providing medical services may be exempt from VAT if their work falls within their registered profession and primarily protects, maintains, or restores health. HMRC outlines specific exempt services, including diagnosis and treatment.

The VAT liability of goods and services provided by registered health, medical, and paramedical professionals, can be a complex area of tax law. HMRC’s guidance provides clarification on the definition of medical services and outlines the specific health services performed by registered professionals that are exempt from VAT.

If a health professional, as defined by HMRC, provides services, those services are generally exempt from VAT, provided that both of the following conditions are satisfied:

1. The services fall within the profession in which you are registered to practice.
2. The primary purpose of the services is the protection, maintenance, or restoration of the health of the individual concerned.

For VAT purposes, the definition of medical services (including medical care and treatment) is limited to those that meet the second condition outlined above. This includes services such as the diagnosis of illnesses, the provision of analyses of scans or samples, and assisting a health professional, hospital, or similar institution in making a diagnosis.

HMRC provides examples of services that are considered to meet the primary purpose of protecting, maintaining, or restoring a person’s health. These include:

• Health services provided under General Medical Services (GMS), Personal Medical Services, Alternative Provider Medical Services, General Dental Services, and Personal Dental Services contracts
• Sight testing and prescribing by opticians (limited to England, Wales, and Northern Ireland)
• Primary and secondary eye examinations (limited to Scotland)
• Enhanced eye health services
• Laser eye surgery
• Hearing tests
• Treatment provided by osteopaths and chiropractors
• Nursing care provided in a patient’s own home
• Pharmaceutical advice
• Services involving the diagnosis of an illness or the provision of analyses of samples that are a key part of a diagnosis

Additionally, certain insurance or education-related services may also be exempt from VAT, regardless of their primary purpose, as they could qualify under other independent exemptions.

Claiming VAT on pre-registration purchases

Businesses can reclaim VAT on pre-registration expenses if they relate to taxable supplies made after VAT registration. The rules differ for goods and services, with time limits of 4 years for goods and 6 months for services. Proper understanding ensures you don't miss out.

VAT can only be reclaimed if the pre-registration costs relate to taxable goods or services that will be supplied by the business after it becomes VAT registered.

Different rules apply depending on whether the costs are for goods or services:

Goods: VAT can be reclaimed for goods still held by the business or for goods used to produce other goods still in possession of the business.

•  Time limit for reclaiming: 4 years from the date of registration.

  Services: VAT can be reclaimed for services related to the business.

•  Time limit for reclaiming: 6 months from the date of registration.

Pre-registration VAT should be reclaimed on the business’s first VAT return. In certain cases, it may be possible to backdate the VAT registration. This should be considered if there is additional Input Tax that can be recovered.

There are specific provisions for partially exempt businesses, businesses with non-business income, and the purchase of capital items under the Capital Goods Scheme (CGS). These rules may affect the recoverability of VAT and should be reviewed in detail based on the circumstances of the business.

When can you recover VAT on a car purchase

Reclaiming VAT on company cars isn’t as simple as it sounds. Generally, businesses can’t recover VAT unless the car is used exclusively for business purposes. But there are exceptions—like taxis, driving schools, and commercial vehicles. Here’s what you need to know.

There are complex VAT rules that determine how much VAT can be reclaimed when buying a new car. Generally, businesses cannot recover the VAT paid on a car purchase.

An exception occurs when the car is used exclusively for business purposes. This has been clarified through various legal cases, establishing that to qualify for VAT recovery, the car must not be available for personal use. This means that the car should only be accessible to employees during working hours and should never be used for personal trips. Businesses can reclaim VAT on a new car purchased for specific activities, such as for taxis, self-drive hire, or driving instruction.

If a business leases a qualifying car for business purposes, they can normally reclaim 50% of the VAT paid. The 50% block is to cover the private use of the car.

The rules are generally more straight forward for the purchase of commercial vehicles such as a van or lorry. VAT on a lorry, van or other commercial vehicle can be recovered if it is supplied to a registered person and is used for the purpose of their business or trade. HMRC usually ignores any incidental private use of most types of commercial vehicles.

VAT Reverse Charge in Construction: What You Need to Know

Navigating VAT in the construction industry can feel like untangling scaffolding. Enter the VAT reverse charge—special rules that mean sub-contractors no longer charge VAT on services but contractors handle the tax instead. Here's how it works and who it affects.

There are special VAT reverse charge rules that can apply to certain construction businesses. When these rules apply, the supply of most construction services between construction or building businesses is subject to the domestic reverse charge. The reverse charge only applies to supplies of specified construction services to other businesses in the construction sector.

The charge applies to standard and reduced rate VAT services:

• for businesses who are registered for VAT in the UK; and that are
• reported within the Construction Industry Scheme.

This means that where the rules apply, sub-contractors no longer add VAT to their supplies to most building customers, instead, contractors are obliged to pay the deemed output VAT on behalf of their registered sub-contractor suppliers. However, the deemed output tax is also available as a deduction from VAT paid if it qualifies as input VAT according to the usual rules. In which case there is no cash flow penalty for contractors. 

The VAT domestic reverse charge applies to the following services:

• constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not), including offshore installation services;
• constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours, pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence;
• installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure;
• internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration;
• painting or decorating the inside or the external surfaces of any building or structure; and
• services which form an integral part of or are part of the preparation or completion of the services, including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works.

VAT Flat Rate Scheme overview

The VAT Flat Rate Scheme allows businesses to pay VAT as a fixed percentage of their total turnover, which includes VAT. The applicable percentage varies based on the business type. This scheme is designed to simplify VAT accounting, thereby reducing the administrative burden associated with VAT compliance.

The scheme is open to businesses that expect their annual taxable turnover in the next 12 months to be no more than £150,000 (excluding VAT). This annual taxable turnover includes all sales—standard, reduced, zero rate, and other supplies—but excludes the actual VAT charged, VAT-exempt sales, and sales of capital assets.

Since April 2017, a 'limited cost trader' test has been in place. Businesses that meet the conditions as limited cost traders must use a fixed rate of 16.5% under this scheme. For these types of businesses, it is usually beneficial to opt out of the VAT Flat Rate Scheme and use traditional VAT accounting.

Once enrolled, businesses can remain in the scheme as long as their total income does not exceed £230,000 in any 12-month period, with special provisions for temporary increases in turnover. Additionally, there is a 1% discount available for businesses in their first year of VAT registration.