A Guide to VAT for Start-up Businesses

A step by-step guide to Value Added Tax (VAT) and when you need to register your business for it

A Guide to VAT for Start-up Businesses

How do I reclaim input VAT?

Remember that you can only reclaim input VAT on business purchases, which in most cases will be offset against the full amount of output tax you will have to pay. There are specific rules for business owners looking to reclaim input VAT and specific items that are eligible to be reclaimed; you cannot reclaim input VAT on any non-business purchase.

Commercial vehicles

If you use a car exclusively for business purposes then you can reclaim input VAT on fuel, reclaim VAT on fuel used for business purposes, or reclaim all VAT and pay a ‘fuel scale charge’.

In the majority of cases you cannot reclaim VAT on company car purchases and VAT is 50% blocked on car leasing costs, unless the car is used exclusively for business.

Exempt supplies

If you make only exempt supplies then you cannot register for VAT and you cannot reclaim input VAT. If you deal in both exempt and taxable supplies, your business is what’s known as ‘partially-exempt’ and you can register for VAT and can recover a portion of your input tax.

HMRC has produced a detailed guidance on exemption and partial exemption as it relates to VAT, which you should read in full if you think it applies to your business.

Home-based businesses

If you run your business from home then you are able to reclaim a proportion of VAT on certain expenses, such as VAT on business phone calls or conference calls.

Purchases outside the EU

Goods or services purchased from suppliers outside of the European Union (EU) usually attract an import VAT charge at the same rate as if purchased in the UK (20%). You can reclaim this VAT as input VAT provided you have the correct documents. Any import duty you have paid cannot be reclaimed.

Purchases inside the EU

Purchases of goods and services from suppliers in other EU countries can usually be made without paying VAT when the goods enter the UK. Instead, you declare the VAT due as ‘acquisition tax’ on your VAT return and you can usually reclaim it as regular input tax when the time comes.

When can I de-register from VAT?

If your business’ VAT taxable turnover for the year is less than or equal to £81,000, or if you expect it to fall to £81,000 or less in the next 12 months, you can cancel your VAT registration.

De-registration involves completion of a final VAT return and you must inform HMRC and explain why your turnover has fallen – it could be simple business difficulty, or you may have reduced your staff numbers or changed contract hours.

If you sell or liquidate your business, you will also need to contact HMRC to de-register.

When do VAT exemptions and relief apply?

There are different VAT regulations for companies who decide to:

  • Buy, sell, let, sub-let or develop property.
  • Agree a special discount or rebate with a customer or supplier that is documented.
  • Manually or outside the normal business accounting system.
  • Enter into a reciprocal arrangement with another business.

Other areas where special VAT rules apply include imports and exports, company cars, buying or selling a business, bad debts, free gifts and business promotions, and supplies to employees for either company or personal use.

The HMRC offers a full list and guide of VAT exemptions and relief here.

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  1. what is the VAT number for Masat Ltd?

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