Five interesting VAT rules you may not know

30 March 2023

Luke Anderson

Building & Construction, Ambitious Startups, Accounting & Compliance, Building a Business, Property Investors & Developers

VAT is a complex tax, with many different rules and regulations and in many cases what you assume would be the correct rule turns out to be something entirely different.

We have highlighted five VAT rules that you may not be aware of!

Postage

You may think that you should charge VAT on your postage charges to customers all the time.

However this is not the case!

Postage can form part of the same supply as the goods that the customer is purchasing and would therefore follow the same VAT rules as the goods themselves.

How do I know which rules apply to me?

This is dependent on whether or not the delivery forms part of the ‘contract’. The easiest way to determine this is to look at the options you offer for postage.

If the postage is an optional extra i.e. you could do click & collect, then delivery is outside of the contact and would be standard rated.
If you are a warehouse or the only option a customer has is to have delivered goods, then this is part of the contract and therefore the delivery charge follows the VAT charge on the goods.

Flat rate VAT scheme

Under the flat rate scheme all income needs to be taken into account when calculating your VAT liability.

Therefore any sales that you make that are zero rated, exempt or outside the scope of UK VAT e.g. foreign sales, would be included in Box 6 on the VAT return which would then be multiplied by your flat rate.

Are there any exceptions?

The only exception to this rule is if you are invoicing under the domestic reverse charge, this income is excluded from your flat rate calculations.

In addition to this, if you receive domestic reverse charge supplies, then you must ensure that these amounts are shown in both box 1 and box 4 so that you pay and recover the VAT.

VAT Rules for Sole traders

If you are VAT registered as a sole trader you need to be aware that it is you as an individual that is VAT registered and therefore any income you receive may be subject to VAT.

The main example of this is if you have a rental property, this would be included within your taxable turnover. Residential rental income is exempt which then causes the potential issue of partial exemption.

What if I have two separate trades?

You should also be aware that if you have two separate trades then both of these trades fall under the VAT registration – you cannot be registered in one and not the other.

It is the person, not the business, that is registered for VAT.

Storage

Charges for storage are not always subject to VAT.

It is firstly dependent on the contract in place.

If the contract is for storage at a site but it doesn’t state that the customer has rights to a specific area, i.e. you are storing their goods wherever in your warehouse that has space, then this is considered a service and would therefore be standard rated.
If you state to the customer that they have rights to use a specific area, i.e. they can have an area of your land to store their goods, then this is considered a supply of land and would therefore be exempt unless you have opted to tax the land/building.

Change of Intended Use of Buildings

The intended use of a building will determine the VAT rules, so if the intended use changes at any point in time then the VAT rules change from that point onwards.

Example 1.

If you were constructing a building to use as an office for your business then you would be able to recover all of the VAT on the costs.

If halfway through the build the decision was changed and the office was going to be rented out instead then you would stop recovering VAT at that point (assuming no option to tax) and would not need to repay the VAT recovered to date.

You should ensure that there is proof, e.g. minutes of meetings that show the changes in decisions, to justify the claims in the event HMRC were ever to investigate.

Example 2.

Similarly if you were working for a customer on a new build you would be charging your services with zero rated VAT.

However if the planning changed and the building was no longer zero rated, e.g. it may now become an annexed ancillary, you would only need to change the VAT treatment on invoices going forwards.

Again, you should always retain supporting evidence of such changes.

Care with Opt to Tax Buildings

Please be aware however that if it is an opted to tax building, then there may be a clawback of VAT if there has been a change in intention since the building was opted.