VAT year end: What VAT adjustments do you need to make?

It’s time to stop and think about the end of the VAT year, which usually means revisiting your registration’s VAT recovery under the partial exemption rules. The Court of Appeal judgment in HMRC v Colchester Institute Corporation (‘CIC’) this month brings into sharp focus the need to understand the VAT treatment of all income, especially any grant funding that you might receive.

You may not have realised that you have a VAT year, but all VAT registrations do. Unless there’s a specific agreement with HMRC for a different date, the VAT year is a period of 12 calendar months that normally ends on 31 March, 30 April or 31 May, depending on your return periods. If you make monthly returns, your VAT year ends on 31 March. For new VAT registrations, the first adjustment period will run from the effective date of registration to the start of the next VAT year; so for most new registrations will be less than 12 months long.

Why does this matter?

Registrations that generate any exempt income, those with non-business activities, or which hold any Capital Goods Scheme assets, will need to review their annual position to calculate any VAT adjustments that are required. The CIC judgment has found that what have previously been accepted as grant funding arrangements that are outside the scope of VAT are, in law, now to be treated as business income which is likely to adversely impact an organisation’s VAT profile.

Annual adjustments

The VAT that you claim in each return period is provisional until you review it over the longer period ie the VAT year. This is because many factors can affect the proportion of taxable vs exempt supplies made over time, particularly for seasonally impacted registrations. This is also the chance to re-evaluate your exempt input tax under the de minimis rules, which could mean recovering more VAT than you have previously.

If you undertake any non-business activities – broadly, those that are non-income generating – then you will also need to check your annual VAT recovery calculations. Where non-business activities are grant funded, the recent CIC decision may mean that this income needs to be treated as exempt income for the purposes of calculating VAT recovery.

Capital Goods Scheme (CGS) adjustments

The CGS requires adjustments to be made to the initial amount of VAT claimed when you acquire, create or construct “capital items” for use in your business and have incurred VAT on them. Capital items for CGS purposes are land/property expenditure over £250,000, spend on a single computer over £50,000, spend on aircraft, ships, boats and other vessels over £50,000.

Essentially, if during the adjustment period of ten years for land/property, or five years for other CGS items, there is any change in the level of taxable use, then you must make an adjustment to the amount of VAT originally recovered. This adjustment, if required, is calculated by reference to the use in your VAT year but is reported in the second VAT return of the next VAT year.

Tour Operators Margin Scheme (TOMS)

TOMS is a special VAT scheme with HMRC for businesses that buy in and resell travel, accommodation and certain other services. If you fall within the scheme, then it’s essential that you complete a year end calculation immediately after your financial year end and make the relevant output tax adjustment on your first VAT return after the end of your financial year end.

Other considerations

At this time of year, it’s also worth thinking about other aspects of VAT within your business and whether any changes in turnover could affect the way you’re reporting to HMRC. Some of the things you might need to consider include:

• Cash accounting. If you use cash accounting, are you still below the limit? (VAT taxable turnover of £1.35 million or less.)
• Payments on account. Have you breached the threshold of £2.3 million in any period of 12 months or less?

Need help?

If you have any queries or need any advice with your tax affairs, please get in touch with your usual Larking Gowen contact. You can find contact details on the Our People section of the Larking Gowen website. Alternatively, call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Gillian McGill