Discover how to get money back from the taxman
Jo Nockels, of TaxAssist Accountants, explains how franchise owners can claim back VAT on their investment
Value Added Tax (VAT) is a tax charged on most goods and services in the UK, which is administered and collected by HM Revenue & Customs (HMRC).
If a VAT-registered business is charged VAT when they buy goods or services, they can generally reclaim the VAT they have incurred. If the entity is not VAT-registered, then they normally cannot recover VAT they are charged.
VAT-registered businesses charge customers this tax on top of the sales price, collect the cash and then pay it over to HMRC, net of any VAT they’ve incurred on their purchases.
Franchisors, including TaxAssist Accountants, will often insist that their franchise owners register for VAT in order to reclaim the VAT on the Franchise Fee, which is usually fairly significant.
Please note that while you may be able to recover the VAT on the Franchise Fee, this does not necessarily mean the fee will be deductible for income tax purposes.
When to register
The main reason a business must register for VAT is because its taxable turnover for any consecutive 12-month period exceeds the VAT registration threshold.
Most small business owners would rather avoid VAT registration because it means an additional 20 per cent (the current standard rate) on their sale prices that – if you are selling to the general public, who can’t recover the VAT they are charged – will make your prices less competitive.
As mentioned above, in contrast, franchise owners will often choose or be advised to register voluntarily. This is in order to recover the large amount of VAT on the franchise fee and also, if they’re selling to other VAT-registered businesses, being charged VAT won’t bother them because they’ll be able to recover it.
Please note there are two instances when an entity cannot register for VAT. Firstly, if it does not meet the definition of a business as stated by HMRC for VAT purposes. Secondly, if it tends to sell only goods or services that are exempt – common examples would include insurance services, the provision of finance and education.
How to register
You will need the following information to hand in order to complete your VAT registration: National Insurance Number or ‘Tax Identifier’– a unique taxpayer’s reference
- Certificate of Incorporation/Incorporation Details
- Details of all associated businesses within the last two years
- Business bank account details
- Details of the business that has been transferred, if appropriate
- There are currently two ways to register for VAT: online or via a paper form.
Do it online
Unless you have unusual circumstances, you may register for VAT online at HMRC’s website www.hmrc.gov.uk. In order to gain access to the VAT online services, you must first have registered for HMRC Online Services or the Government Gateway.
Please note, if you are registering a partnership for VAT online, you must also complete and submit paper form VAT2, (which informs HMRC of who the partners are), as this has not yet been incorporated into HMRC’s online system.
Send a paper form
Alternatively, you may register using form VAT1 which is available for download from HMRC’s website.
At TaxAssist Accountants, we prefer our franchise owners to register for VAT using the paper form, because we provide them with a letter to enclose confirming to HMRC that they are a franchise owner of our network.
Quite often HMRC will query VAT returns showing large VAT refunds, so the purpose of this letter is to pre-empt HMRC stopping the refund and asking for more information.
Considerations for newly VAT-registered franchise owners
Waiting for your VAT number
While you’re waiting for your VAT registration number to come through from HMRC, you won’t be able to charge or show VAT on your invoices to customers. You should increase your prices by the amount of VAT you would have charged, and then reissue the invoice to show VAT, once you receive your number.
Keep all of your invoices and receipts – for income and expenditure! This is a legal requirement, and if HMRC enquires – which is not unusual for franchise owners receiving large rebates on their first VAT return – it may ask to see copies.
VAT is normally accounted for during the quarters in which the invoices are dated, but the cash accounting scheme allows the VAT to be accounted for when cash actually exchanges hands. This can be particularly useful for new businesses that may experience cashflow problems in their early stages and also for existing business which have slow-paying customers.
The Cash Accounting Scheme is available to businesses with turnover under £1.35 million.
Know what you can recover
Make sure you know which costs you can recover VAT on, preferably by seeking the advice of a professional. The most common example of where complications can arise is fuel bought for a vehicle that has private and business use – there are four different methods an unincorporated entity can choose from to calculate the VAT they can recover!
Written by Jo Nockels (pictured right)
Jo Nockels, ACCA MAAT, is Training and Communications Manager, at TaxAssist Accountants, a franchise which has become one of the UK’s largest networks providing tax and accountancy advice and services specifically for small businesses.
Please note: This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.