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Compliance investigations conducted by HM Revenue & Customs have resulted in 10 per cent extra VAT being secured from small businesses. An extra £3.9bn has been collected this tax year, in comparison to a total of £2.2bn being collected during 2010-11.

According to UHY Hacker Young, HMRC has increased challenges to small business VAT arrangements in an aim to increase tax receipts. The accountancy group claims that various companies and organisations have been targeted by HMRC, making it difficult to reclaim VAT and challenging VAT arrangements that are already in place.

UHY Hacker Young states that many small companies can’t afford to raise a dispute with HMRC, although it hasn’t always been successful in court. Self-storage businesses have been targeted, with Lok’nStore claiming that as 99.9 per cent of its premises are used for storage, that is the percentage of VAT that it can claim. Although HMRC challenged this in court, the First-tier tribunal agreed with Lok’nStore.

In 2013, HMRC claimed that an online company selling spectacles did not provide ‘medical dispensing services’ and so couldn’t reclaim VAT. The First-tier tribunal didn’t agree with HMRC. A partner at UHY Hacker Young said that small companies were increasingly likely to face an investigation by HMRC as the organisation tried to increase tax receipts. He added that a small business with limited resources may find it difficult to challenge a decision made by HMRC and, although it may not agree with the decision, won’t pursue it further.

When can you reclaim VAT?

If you pay VAT on goods and services that are used for your business, you can usually reclaim the VAT paid. You must keep records, including VAT receipts, so that you can reclaim everything due. If an item is put to business and personal use, you can only reclaim the percentage used for the company.

You may also be able to reclaim VAT for goods bought for business use before you were registered for VAT. Usually, you can claim on goods purchased up to three years prior to registration, while services can only be claimed if they were bought within six months of VAT registration.

When you can’t reclaim

You can’t claim on goods and services that aren’t used in the business. If you sell goods that are exempt from VAT, you can’t reclaim VAT paid.

As VAT is a complex issue, contact the experts here at The Accountancy Partnership for advice.

About The Author

Karl Bilby

We work very closely with our expert accountants to bring you the latest factually correct tax and accounting news. We also enjoy writing about small business news that we hope you find useful!

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