Monday, 17 August 2009

Could reclaiming input VAT be simplified?

Driving over to visit mother-in-law yesterday, I was mulling over what makes bookkeeping frightening for small business owners.

I think it can pretty much be summed up in three letters: V. A. T.

Otherwise it's largely a case of putting things in the right box, which can be simple or complicated depending on the business and what software they're using for the bookkeeping.

But when you have to worry about what you can reclaim input VAT on, it starts getting scary.

For example, if you've got a receipt for petrol, a packet of crisps and a newspaper bought at a garage, there would be VAT on the petrol and the crisps, but not the newspaper.

If you're working the VAT fuel scale charge, you can claim the VAT on the petrol.

But, strictly speaking, you can't reclaim input VAT on the crisps because they're not an allowable business expense. (I think the strict rules are that you can only claim food as a business expense if you're away overnight on business. HMRC say you have to eat anyway whether you're working or not.)

So as well as dividing up the receipt between motor (petrol), drawings/DCA (crisps) and either business stationery or drawings/DCA depending on whether the newspaper was for business or personal reading, you've got to divide up the VAT into what can and can't be claimed.

And all that for a receipt of under £100. Ow.

The VAT flat rate scheme would be helpful in this case, because when you're using that scheme there's no reclaim of input VAT apart from on large assets. So you don't have to worry about what input VAT you can and can't claim.

But only businesses with an annual VAT taxable turnover of 150,000 pounds or less [apologies - my computer hasn't got a pound sign!] can join the VAT flat rate scheme.

So, is it time for HMRC to simplify the rules for larger businesses as well?

Perhaps if the VAT that can't be claimed is less than 5% of the total VAT on that bill (as it would be in the above example of a tankful of petrol and a packet of crisps), then the VAT on the whole bill could be claimed?

I would imagine the amount of VAT revenue lost would be negligible and it would make life easier for businesses, particularly those with lots of travelling staff.

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