Apparently, you’ve a much better chance of remembering something if you write it down. Preferably by hand, because there’s something about the link between the action of the hand and the brain that helps imprint what you’ve written down into your memory. I’m not sure whether the same works if you type it on your pc or tablet, but maybe it’s worth a try.
I put the theory to the test recently and it worked! I was talking to a property developer about the VAT recovery rules. It was quite a long discussion and I was trying to explain the difference between exempt and zero-rated and why it was so important. I was getting frustrated because he kept saying “exempt” when he meant “zero-rated” and vice versa and I didn’t want to keep interrupting him to correct him.
But he wanted to discuss a whole range of potential scenarios, many of which hinged around the difference between the two terms. And in fact, it was costing him more time and money because we kept going over the same issues again and again.
Two minutes to learn an important rule
So I made a suggestion to him. I said that of course, if he wanted, we could carry on our discussion. By that stage we’d been talking for about 40 minutes and I still wasn’t sure that he fully appreciated how the rule worked, because he was looking at each situation in isolation rather than applying the broad principle. I suggested instead that he write down each of the main scenarios he was considering and did a bit of the VAT analysis himself. I dictated the rules to him over the phone so that he could write them down by hand, before ending the conversation. He could then send his initial analysis to me and we’d discuss his conclusions the next day.
He sent me his analysis – a list of 6 or 7 scenarios saying whether he thought the income was exempt or zero-rated and what that meant for his VAT recovery. And I was really pleased because all but one of his conclusions was right!
When we spoke about it, he said that once he’d actually written down the rule for himself, he had a sort of light-bulb moment and things started to make sense. And he was even able to identify his incorrect answer as soon as we started to discuss it.
Now he understood the difference between the two, it meant that we could use our discussion time (and his money!) to talk about the scenarios in more detail and cover a lot more ground. So understanding the rule saved him both time and money and meant that we could start thinking about things from a planning perspective, rather than stopping to remind him about the basic principle.
And it’s one of the most fundamental rules in VAT.
It’s the difference between zero-rated and exempt. Neither zero-rated nor exempt income is liable to VAT. But it doesn’t mean the same thing.
If your income is zero-rated, you can claim VAT on most or all of your costs.
If your income is exempt, you can’t recover VAT on your costs, unless the VAT falls within certain de minimis limits.
So if you can’t recover VAT on your costs, it means that your costs are up to 20% higher.
And if you’re a residential property developer, it matters because most sales or rental income from residential property is exempt from VAT.
But there are some limited situations when the sale or long lease in a new or converted residential property is zero-rated, which means that you can recover VAT on your costs.
Of course this isn’t the whole story. First, the VAT recovery principle applies to any supplies that are “taxable”. If your income is liable to VAT at 20%, 5% or the zero-rate, you can recover some or all of the VAT on your costs. Second, in some limited cases, if your income is exempt, you can still recover VAT on your costs if the VAT falls within certain “de minimis” limits”. So there’s still a lot more to learn.
But if you can remember the main difference about VAT recovery, its a really good starting point. And, based on my completely unscientific test, it seems that if you write it down, you’ve a much better chance of remembering it.
Marie
May, 2014