For most fully taxable businesses, VAT can be reclaimed on goods and services used in the business. This means that businesses must consider where there is personal or private use of goods or services bought for the business and can usually only reclaim the business proportion of the VAT.

For example, VAT is recoverable on all the costs of mobile phones provided to employees where no personal use is allowed. Where businesses allow private calls to be made at no charge the VAT recovery must be apportioned on a fair and reasonable basis. Where employees pay for the private use of their phones the business is allowed to reclaim the input tax in full provided an output tax charge is accounted for in respect of private use.

You cannot reclaim VAT for:

• anything that is only for private use;
• goods and services your business uses to make VAT-exempt supplies;
• business entertainment costs;
• goods sold to you under one of the VAT second-hand margin schemes;
• business assets that are transferred to you as a going concern.

There are different rules for a business that incurs expenditure on taxable and exempt business activities. These businesses are partially exempt for VAT purposes and are required to make an apportionment between their activities using a 'partial exemption method' to calculate how much input tax is recoverable.

There have been significant changes to the EU VAT rules for the sale of goods for businesses selling goods to consumers (B2C) located in the EU from 1 July 2021. The changes mean that EU VAT must be applied on all goods that are sold online in the EU regardless of price including those through online marketplaces such as Amazon or eBay.

Whilst the UK has officially left the EU, these changes will have effect on UK trade. They will affect those sending goods directly from Great Britain to consumers in Northern Ireland and the EU.

To help deal with these changes, the EU has introduced a new online Import One Stop Shop (IOSS) to facilitate and simplify the declaration and payment of VAT for online B2C sales of goods imported in the EU with a value not exceeding £135 (€150).

If you only sell through a marketplace, they should have already registered for the IOSS. There is also no longer a de-minimis limit as the old rules that allowed items with a value of €22 or less (known as small consignment relief) to be imported into the EU have been removed. Goods with a value of more than £135 (€150) continue to require formal customs clearance as before.

There are also significant changes in relation to the movement of goods from Northern Ireland to the EU and imports of low value goods into the EU or Northern Ireland.

If you require any assistance in dealing with these changes, please let us know.

The VAT domestic reverse charge accounting mechanism was put in place to help prevent criminal attacks on the UK VAT system by means of sophisticated fraud.

The domestic reverse charge procedure applies to the supply and purchase of the certain specified goods and services.

The specified goods that the reverse charge applies to are:

• mobile phones 
• computer chips 
• wholesale gas 
• wholesale electricity 

The specified services are:

• emission allowances 
• wholesale telecommunications 
• renewable energy certificates 
• construction services 

Under the domestic reverse charge rules, it is the responsibility of the customer, rather than the supplier, to account to HMRC for VAT on supplies of the specified goods or services. It should be noted that there are exceptions within each category, and it is important to check if the domestic reverse charge is required on a transaction or not. 

The domestic reverse charge should not be confused with reverse charge for cross-border services which applies to certain services from abroad. 

A business that incurs expenditure on taxable and exempt business activities is partially exempt for VAT purposes. This can happen where a business makes or intends to make both taxable and exempt supplies and incurs input tax that relates to both kinds of supply. Under this scenario, the business must make an apportionment between the activities using a 'partial exemption method' to calculate how much input tax is recoverable.

There are a number of partial exemption methods available. The standard method of recovering any remaining input tax is to apply the ratio of the value of taxable supplies to total supplies, subject to the exclusion of certain items which could distort the calculations. The standard method is automatically overridden where it produces a result that differs substantially from one based on the actual use of inputs. It is possible to agree a special method with HMRC.

The VAT incurred on exempt supplies can be recovered subject to two parallel de-minimis limits.

The tests are met where the total value of exempt input tax:

1. Is under £625 a month (£1,875 a quarter/£7,500 a year); and
2. Is less than half of the total input tax incurred.

If both tests are met the VAT can be recovered. Businesses that are partially exempt, need to complete this calculation on a quarterly basis as well as completing an annual calculation.