What Can I Claim on VAT?
VAT, or Valued Added Tax, is a tax charged in the United Kingdom. It is similar to a sales tax, but is charged at each stage of the production, manufacturing and supply process. Because a business pays VAT to suppliers on its materials, then charges VAT to customers on its finished goods, the overall effect is that it pays a tax based on the value it adds in the supply process. The rate of VAT payable depends on the specific product or service.
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Input Tax
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Although a company must charge the appropriate VAT on goods it sells to customers, it does not have to pay all of the money to the UK tax office (Her Majesty's Revenue and Customs.) Instead, it can deduct the money it has itself paid in VAT to suppliers. This deducted money is known as input tax. The process of listing this money as a deduction is sometimes known as "reclaiming VAT," in the sense that the company has already paid the cash and now reclaims it in the form of a credit.
Purchases Before Registration
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In most circumstances, a business can deduct VAT it spent on purchasing goods for up to four years before it registered to pay VAT. With services, this period is reduced to six months. VAT can only be claimed on goods the company still possesses and intends to use either for business purposes or in making a product for sale.
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Private Use
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In principle, VAT can only be reclaimed where it has been spent on goods or services for business use. Where a purchase is used for both business and personal purposes, the business must designate the proportion of usage for each purpose and can then reclaim the appropriate proportion of the VAT. Any fair and reasonable method can be used to decide these proportions, though the business may be required to justify it to tax officials.
Bad Debts
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Unlike other forms of VAT reclaiming, bad debt relief applies to VAT that the company has charged a customer and already paid to HMRC. A business can reclaim the VAT related to the sale as long as the debt is between six and 42 months old, has been formally written off in the business's accounts, and has not been sold on or assigned to a debt factoring company.
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