VAT Myths
Have you ever received tax advice that sounded a little too good to be true? This happens more often than you might think, and at Price Bailey, we often hear horror stories where individuals have been given the wrong advice while down at their local.
Unfortunately, following incorrect advice can lead to serious compliance issues and unexpected costs. That’s why our VAT specialists are here to separate fact from fiction and help you stay on the right side of the rules.
In our series of VAT Myths videos, we debunk some of the most common VAT myths once and for all.
Zero-Rated & Exempt
Myth: Zero-Rated and Exempt supplies are the same
It’s a common belief that zero-rated and exempt supplies both mean “no VAT,” and therefore the two terms are interchangeable. Many assume that because neither involves charging a positive amount of VAT, the rules and implications for businesses are identical.
Reality: Zero-Rated and Exempt are different
Zero-rated supplies are taxable at 0%, which means businesses selling zero-rated goods or services can register for VAT and reclaim VAT on related costs. Examples include most food items, children’s clothing, and books. Exempt supplies, on the other hand, are legally removed from having VAT applied to them, meaning no VAT is charged, and businesses generally cannot reclaim VAT on associated expenses. Common exemptions include education, insurance, and financial services. While both result in no VAT amount being added, the underlying rules and recovery rights differ significantly.
VAT and exports of non-UK supplies
Myth: Selling to customers outside the UK means no VAT
Another common misconception is that all sales to customers outside the UK, whether goods or services, are automatically zero-rated for VAT. Many assume that exporting or supplying internationally removes any VAT obligations in the UK.
Reality: VAT rules for overseas sales depend on goods vs. services
For goods, zero-rating is possible only if you have valid evidence that the items have left the UK, and without this, HMRC may treat the sale as domestic and apply full VAT, along with potential penalties. For services, the rules are more complex and depend on the nature of the service and the location of the customer. Some services may not attract UK VAT, while others could require VAT registration in the customer’s country. International VAT compliance is not a one-size-fits-all; it requires careful review of each transaction.
VAT registration for Partnerships
Myth: Partnerships avoid VAT registration if each Partner earns below the threshold
A common misunderstanding is that VAT registration depends on the income of individual partners. Some believe that if each partner in a business earns less than the VAT threshold, the partnership does not need to register. For example, three partners earning £35,000 each might assume they are exempt because individually they fall below the limit.
Reality: VAT registration is based on the Partnership’s total turnover
For VAT purposes, the partnership itself is treated as the taxable entity, not the individual partners. The VAT registration threshold applies to the combined taxable turnover of the partnership over any rolling 12-month period or in the next 30 days. If the total exceeds £90,000 (the current threshold), the partnership must register for VAT within 30 days. In the example below, £35,000 per partner equals £105,000 in total, which is above the threshold and triggers mandatory registration.
Disaggregation
Myth: Splitting businesses can keep you below the VAT threshold
This myth suggests that running two separate businesses, such as a bar and a catering service, and keeping the accounts separate means neither needs to register for VAT, provided they each stay under the threshold. This approach is sometimes seen as a clever way to avoid VAT obligations.
Reality: Artificial separation is not allowed
HMRC treats businesses that are economically, organisationally, or financially linked as a single taxable entity for VAT purposes. For example, if the businesses share premises, staff, customers, or bank accounts, they are considered one business, regardless of separate branding or bookkeeping. Attempting to split operations solely to remain under the VAT threshold is known as ‘disaggregation’, and is prohibited. HMRC can enforce registration and impose penalties if they determine the separation is artificial.
Option to Tax
Myth: Once you opt to tax a property, it’s permanent
This misconception is that opting to tax a property creates a permanent VAT obligation that carries over to future owners. This myth suggests that once the option is applied, the property is “stuck” with VAT forever, regardless of changes in ownership.
Reality: The option to tax applies only to the current owner
The option to tax applies to the interest held by the person or entity making the election. This will make any grant of that interest subject to VAT at the standard rate, such as when they rent out or sell the property. When the property is sold, the new owner is not bound by the previous owner’s decision. They can choose whether to opt to tax themselves. The option does not transfer automatically and is not a permanent feature of the property.
VAT and private school fees
Myth: You can reclaim VAT on private school fees through your businesses.
A common misconception is that VAT charged on private school fees can be reclaimed by processing the expense through a VAT-registered business. Some believe that if they operate as a sole trader, personal costs such as school fees can be treated as business expenses for VAT recovery purposes.
Reality: VAT on private school fees is not recoverable as a business expense
VAT can only be reclaimed on costs that are directly related to your taxable business activities. Private school fees are personal expenses and have no connection to the goods or services your business supplies. Even if you’re a sole trader, the rules are the same, only VAT on legitimate business expenses can be recovered. Trying to claim VAT on school fees could lead to compliance issues and penalties from HMRC.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.
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