cost are likely to rise

What VAT exemption means

VAT exemption is an important business issue because it can prove costly when VAT claims are blocked.  Having exempt activities in your business deserves some careful thought as it can lead to real costs being incurred.  This is because you can only reclaim VAT when it relates to VATable activities.  A business making a mix of exempt and VATable supplies is called partly exempt and covered by some tricky rules.  Yet very few businesses could explain what VAT exemption means, and that is a dangerous situation.

I was interested to read a recent study by Ipsos MORI exploring knowledge of partial exemption within businesses. Given that their sample of >5,000 organisations was biased towards larger businesses all based in the 17 sectors typically making exempt supplies, it is rather amazing that the ratio falling into the category “Don’t know/not heard of partial exemption” ranged from 31% (financial services) to 67% (retail).

All of this made me wonder what the percentage of “Don’t know/not heard of partial exemption” would be if the survey had used an SME sample. I suspect much much higher and that is quite scary.

The reality is that lots of small partly exempt suppliers ought to be jumping through a lot of hoops to arrive at their recoverable input VAT. Instead, whether through ignorance or otherwise, entitlement to full VAT recovery is often simply assumed.

Perhaps the most surprising sector to see in the survey list of commonly exempt businesses is retail. After all there are very few physical items that you could buy from a typical retailer that could ever be exempt. However what about a retailer selling something VATable with a valuable, separate and additional charge for insurance or finance? Retailers selling cars, furniture, electrical goods, jewellery – basically anything that’s pretty expensive – could easily be receiving exempt commissions which potentially jeopardise VAT claims on their business costs. Similarly accountants, solicitors and estate agents might often receive insurance or finance commissions leading to their entitlement to reclaim VAT on overhead costs not being guaranteed.

In a nutshell VAT exemption is generally bad news for VAT claims by any kind of organisation. The best approach is to address partial exemption by looking at how costs are being used and run the calculations. That way if challenged by HMRC to justify their input VAT claims they ought not be caught on the back foot.

Posted in Relief.