During the time of year when many businesses are preparing their partial exemption and business/non business calculations, as a default position, HMRC expects businesses to use their income to calculate the amount of VAT incurred on overhead costs which is recoverable.
Whilst using income is a 'one size fits all' approach that works for the average business, it may also be that one size doesn’t really fit very many at all, because very few clients are actually 'average'.
We have been working with several organisations to review the way they calculate their VAT recovery position. Particularly where they have either non-business or exempt activities to see if there are more accurate ways of calculating the VAT recovery position, whilst also reducing the irrecoverable VAT they suffer.
Case in point
Client 1: we were asked to consider whether VAT grouping a trading subsidiary with the charity could result in an extra VAT recovery of £25,000 per annum. On closer inspection we found that we may be able to make them fully taxable with no adverse consequences, resulting in additional recovery of over £100,000 per annum going forward.
Client 2: we found that some taxable income had been omitted from the calculations and we are in the process of submitting a retrospective claim to HMRC for over £200,000. The current finance manager had been following the processes which we inherited from his predecessor and had been in place for a number of years. He also questioned whether a VAT group might improve the position when our feasibility study spotted the opportunity.
VAT recovery can be done in serval ways and some of these can be straightforward, for example creating a VAT group to include a trading subsidiary, which has lots of taxable income or creating a special method for capital items which are used slightly differently within the business. Others can be more complex involving staff headcount or allocation of costs to projects. However, the upside can often run into tens or hundreds of thousands of pounds of additional VAT recovery - so encouraging your client to invest in that investigation process could be well worth it!
