VAT and partial exemption is a complicated issue, which affects many businesses that make both taxable and exempt supplies, including studs. For example, selling horses is taxable, whereas letting out surplus boxes and yards could be exempt. Taxable supplies will have VAT charged at either the standard, reduced or zero rate. Although no VAT is charged on a zero-rated supply, such as the sale of grazing or hay, it will still entitle a business to recover input VAT, distinguishing it from an exempt supply.
Such businesses are described as partially exempt and may not be able to recover all their input tax. Partial exemption calculations ensure that only input VAT attributable to taxable supplies is recovered.
Even a fully taxable business should be aware of these rules as circumstances can change. For example, a business letting out spare cottages during the national lockdowns, which were formerly occupied by staff, would become partially exempt.
This may appear daunting. If a business approaches this logically, however, and takes the time to carefully review any income and expenditure, it can prepare its partial exemption calculations with confidence.
The most complicated issues businesses may currently face can probably be traced back to Brexit. Despite the time taken to reach a deal with the EU, there are still ongoing negotiations. We hope the issues with the movement of horses are resolved by the time this article is published and can be addressed in our next article.
One of the main principles of VAT is that only input VAT attributable to taxable supplies is reclaimable. The first step, therefore, is to disallow any VAT relating to expenditure on non-business items, such as for the private use of any goods or services. Next, allocate the business input VAT to taxable or exempt supplies, or both. Expenditure attributable to both is usually an overhead, such as office costs or accountancy fees, but can include anything used for both taxable and exempt supplies. For example, costs for repairs to an access road covering multiple yards, one of which is let out and the other owner occupied, will relate to both taxable and exempt supplies.
Part of the input VAT on overheads will be treated as taxable; the relevant amount determined in accordance with partial exemption calculations. The remaining input VAT on overheads and the input VAT relating to exempt supplies is exempt input VAT and only reclaimable if below the de minimis limits of £7,500 per annum or £625 per month on average and less than half of total input VAT. These are all or nothing limits, if the exempt input VAT is one penny over the limits, then none of it is reclaimable.
The partial exemption calculations are carried out for each VAT return period, or the business can opt to use the previous year’s partial exemption percentage. Either way, an annual adjustment calculation is carried out at the end of the VAT year to account for any seasonal fluctuations.
Capital proceeds, such as from the sale of land, and services acquired from overseas suppliers, such as training and vet fees, are excluded from the calculations.
Any blocked input VAT, such as from business entertaining and on motor cars, is ignored for partial exemption calculations and is not included on the VAT return.
Capital Goods Scheme
If you are incurring capital expenditure in excess of £250,000 (net of VAT) on land or buildings , the input VAT will fall under the capital good scheme. This applies to capital expenditure on either the purchase or construction of land or buildings.
The capital goods scheme is similar to partial exemption, but requires adjustments to be made to the initial amount of VAT claimed to reflect the differences in the use of capital items over the subsequent ten years.
If a business is treating its supplies incorrectly, then the partial exemption calculations will also be incorrect. Livery can be a complicated issue and it is important that you correctly treat supplies as either taxable or exempt.
If your business provides an owner with exclusive use of stabling for their horse(s), then this is an exempt supply of a right over land. This is likely to occur when letting a surplus yard rather than specific liveries.
Where the livery is a broodmare, the stud will almost certainly have the right to move her and her foal around as needed, and the supply will be standard rated.
Livery services provided at a specialist yard, such as trainers, stud farms and yards involved in breaking or pre-training, will always be standard rated regardless of whether or not a specific box has been allocated to the horse.
If you’re are unsure of the VAT treatment of any supplies made by your business or if you would like the comfort of an independent review, please get in touch with your usual Smith & Williamson contact.
Source gov.uk 15/02/21
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.