Q:
Hi
WE have set up a limited company and have registered for VAT shortly afterwards. We are a claims management company who charge clients an application fee if they would like to do a claim with us. Firsty I am correct in thinking that application fee’s are VAT exepmt or zero rated. In addition for our first return we would like to reclaim the VAT on all our start up costs which will anount to a couple of thousand. However I notice on the HMRC website that if you do not charge VAT then you more than likely won’t be able to reclaim any either. Is my understanding correct in this instance?
Even though we do not charge VAT to our customers in the coming month we will be invoicing solicitor firms for various services and charging VAT to them, so long term some thing we will charge VAT for and some we wont.
My worry is that our first return will show zero rated sales and then a minus for the VAT that we want to reclaim – Will this be declined or allowed?
Many thanks…
A:
In principle, it is possible to recover VAT on certain pre-registration expenses including services in the 6 months prior to registration. However this only applies if the supplies you make after being registered are taxable, ie liable to VAT at the standard rate of 15%, the reduced rate of 5% or the zero rate.
If the supplies are exempt, then you can’t recover any pre-registration VAT at all and in fact the company should not be registered for VAT. If some of your supplies are exempt and some taxable, then you will be able to recover the VAT on supplies received that are attributable to your taxable supplies, ie you would be “partly exempt”.
And this is where it gets difficult!
You are probably aware that insurance is exempt from VAT. The exemption also applies to certain insurance related services when supplied by someone acting in an intermediary capacity. This generally includes claims handling.
It sounds as though the services supplied by the company may come under this category, in which case they will be exempt from VAT. This would probably include the initial application fee. You might also have other forms of income in addition to the application fee and you will have to establish the correct VAT liability of each of them. You will have to take into account your trading arrangements, contracts etc to decide the liability.
You need to look at a couple of the HMRC publications which should help you in further detail.
The first is the VAT Leaflet 701/36: Insurance which is here http://tinyurl.com/nmqnp5 on the HMRC website. Section 8 of the leaflet deals with insurance related services and paragraph 8.5 deals with claims management. This should help you decide whether or not the supplies are exempt or taxable.
If you think that the supplies are taxable or partly taxable/exempt, then you can find out more about recovering VAT on pre-registration costs here http://tinyurl.com/lucznk on the HMRC website.
If the supplies are exempt, then the company will not be able to recover any VAT on expenses. If it makes a mixture of taxable and exempt supplies then it may be able to recover a proportion of its VAT.
This is a very difficult area of VAT and it sounds as though you may not have considered all of the VAT issues before starting trading. If you are preparing budgets, financial forecasts or a business plan, you need to ensure that you are taking the correct VAT factors into account – for example, if the supplies are exempt or partly exempt, then the company has to budget for an additional 15% on VAT bearing costs. Your accountant would normally consider these issues to begin with.
To begin with, please have a look at the HMRC publications I have mentioned and let me know if you have any further queries. If you require any formal advice on the VAT position, this would be subject to our normal fee arrangements.
In the meantime, I hope that this information helps you get things sorted out and I wish you good luck with your new venture!
Marie