How the recovery of value added tax (VAT) perform for expenses of motoring, exempt and taxable supplies in a process of setting up a business UK


This blog will discuss the topics of costs of accessories and expense of motoring, relief in the case of bad debts or losses of impairment, case of a trader making both exempt supplies and taxable supplies along with the tests of de minimis, annual test and test for each period of return.

Expense of Motoring

The reclaim or recovery of input VAT can be done in the case if the accessories are used for the purpose of business after buying, for example a car. If a car that is used for the purposes of business, then any VAT that is charged on the costs of maintenance and repair can be considered to be an input tax.

Fuel for Private Use

If the fuel is provided for the purposes that are private in nature, then all the input VAT that is suffered on the fuel is permitted and the business will account for VAT in a normal manner by making the use of a set of prescribed charges.

In the process of setting up a business UK, a person makes the payment of fuel that is used only for the purposes of business, then it can make a claim of all the input tax whose payment is made. However, many of the businesses will make the payment of fuel that is used for the purposes of private motoring by employees.

In the case if a business goes for the provision of fuel both for the private purposes and for the use in business by the employee but the employee instead reimburses the business, then the full price of the fuel for private purposes, then there exists an actual supply liable to tax by the business priced at the amount acquired from that employee. The business can make a claim of its input tax on all fuel, but must be answerable for output tax on the amount whose payment is made by the employee. The HMRC will prove for the acceptance that the complete price of all of the fuel has been reimbursed where a log is kept subject to the recording of private miles and the employee makes a payment of a rate which is calculated on the base of a fuel-only mileage. This rate covers the average cost of fuel. It is hereby mentioned for convenience that the HM Revenue and Customs provide a set of such rates on their website by publishing them for the cases of distinct sizes of the engine.

If a UK incorporation business occurs to provide fuel to its employees that is to be used for private purposes, at a cost below the total cost or with no charge, then there is a supply liable to tax applicable. Then, the business has the following options in order to account for VAT applicable on the fuel:

  • If the company formation London makes the purchase of any fuel, then the business has the authority of not making a claim for any input tax in this regard. No charging of input tax is done in this case. In effect, the fuel is not added into the system of VAT at all.
  • The company formation London can make a claim of input VAT on the fuel bought for the journeys of business. The business is therefore required to keep a record of business and private utilization of the mileage in a detailed form. Output tax is not charged in the case of private use. In effect, the fuel of private nature is not added into the system of VAT.
  • The UK incorporation business can make a claim of input tax on all the fuel that is bought and can make a charge of output tax based on either the charge of fuel scale that gives the reflection of the deemed output in the case of private utilization or on the total price of the supplied private fuel. Once again, this needs the keeping of mileage records in a detailed form. The charge of fuel scale is based on the Carbon dioxide emission of the car.

The rule mentioned above is applicable even in the case where the employees make a payment of the fuel themselves and they are reimbursed by the business. As long as the invoices of VAT for the fuel are acquired by the business, the fuel can be considered as its own input or purchase.

VAT Relief for Bad Debts or Losses of Impairment

The VAT’s relief on the bad debts or the losses of impairment is available if the accounting of VAT has been done, and the debt is old for about six months, as calculated from the due date of payment, and is present in the accounts of a trader in written form.

A trader is allowed to make a claim of a VAT’s refund on amounts that are not paid yet by the debtors in the case if the debt is over the duration of six months old, the trader has accounted for VAT and the VAT has been added in the accounts of the creditor in a written form.

Later, if the debtor makes a payment of the amount owed or a small amount out of the total amount, then the corresponding amount of the value added tax, whose repayment is done, should be paid back to the HM Revenue and Customs.

The claim for the relief for the loss of impairment should be made within the duration of four years of the time when the loss of impairment was first made eligible for the payment of relief. Or you can say that within the duration of four years and six months from the time when the payment was rendered due.

Case of a Trader making both Exempt Supplies and Taxable Supplies

A trader who create company UK and makes both the taxable supplies and the exempt supplies may not be able to make a recovery of all of his input tax.

A trader may only be able to make a recovery of the VAT on supplies that are made to him if it is attributable to his supplies liable to tax. In the case where a person makes a mixture of exempt and taxable supplies, then he is considered to be partially exempt. In this case, all of the input tax may be recoverable because some part of it is attributable to his supplies of exempt nature.

In the case of a trader who is not exempt completely, the apportionment of the input tax must be done between that related to supplies liable to tax and can be recovered, and those related to the supplies that are exempt, except the input tax. The steps involved in the attribution of the input tax include:

  • Calculation of the fact that how much of the input tax is related to making supplies liable to tax. This input tax is completely deductible or can be subtracted.
  • Calculation of the fact that how much of the input tax is related to making supplies, exempt in nature. This is known as the exempt input tax.
  • Calculation in order to determine how much of remaining or residual input tax is to be subtracted making use of the following formula:
  • Taxable turnover that excludes VAT/total turnover that excludes VAT * 100%, rounded up.

In the case where the remaining input tax is less than an amount of £400000, then the rounding up of figure is done to the nearest total percentage, or else, the rounding up of figure is done to two decimal places.

For every period of return of VAT, then usually the trader who is to work out the amount of input tax, of which he can make the recovery of. However, the trader must only make use of only one of the methods in a year, i.e. either the recovery percentage of the preceding year for all the periods of return in the year or the real percentages of each period of return. It should be noted that the same amount of input VAT will be able to be recovered for the year wholly because the difference between the used percentages will be subject to adjustment at the termination of the year.

A substitute method for the attribution of input tax, known as the special method, may be agreed in writing with the HM Revenue and Customs.

Tests of de Minimis

The recovery of all types of input tax can be done if the input tax that is related to exempt supplies is de Minimis or small according to one of the three tests:

  • Under the first test, the total input VAT that is suffered is not any more than £625 in one month on an average and the value of exempt supplies is less than 50% of all supplies.
  • The net input VAT suffered minus less input VAT that is attributed directly to the supplies liable to tax is less than £625 every month on an average and the cost of exempt supplies is less than 50% of the cost of all supplies
  • The input VAT totally attributable to exempt supplies added with the remaining VAT attributed to the exempt supplies, i.e. the total of input tax exempt, is less than £625 each month on an average and less than 50% of its input tax.

Yearly Test

The test that is conducted on a yearly basis, provides an option to the trader to apply for the test of de Minimis every year rather than every VAT period of return.

To make use of the yearly test, the trader should be up to the following conditions:

  • The trader should have been de Minimis in the preceding partial year of exemption.
  • Apply consistently for the yearly test throughout given any partial year of exemption, i.e. does not switch between the tests held quarterly and the yearly test in the year.
  • If the trader has some grounds reasonable, for not having an expectation to suffer more than £1 million in its input tax in its present partial year of exemption.

In the case if these conditions are met, the trader can make the choice of treating himself as de Minimis in the present partial year of exemption. Therefore, the trader can make a recovery of the whole input tax in each VAT period of return without requiring to see if one of the tests of de Minimis are met for each period of return of VAT, meaning that there is recovery of provisional type of all input tax in the year.

By the ending months of the year, the trader should go for a review of his status of de Minimis, making use of the tests of de Minimis that are completely applied to the year. If it happens that one of the tests fails, the trader should carry out an adjustment on annual basis that will result in a repayment of a portion of the input VAT recovered in whole previously.

Test for Each Period of Return

If the trader does not make the use of the annual test, then he must apply the test of De Minimis for every period of return for VAT.

Tests 1 and 2 can be applied in a simple way as they do not have a requirement of a calculation of the remaining VAT by the trader.

The test 3 is noted to be having more complications as it needs the residual VAT calculations to be done, making the use of standard method as a usual way.

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