VAT Limit: Is It Time for a Deminimis Update?

The VAT deminimus limit sits at £7500 per annum, but its been locked in at that value since 1994! Is it time this to be reviewed and if so what limit is more appropriate.

In the last #VITAOpinion I flagged the changes to the Capital Good Scheme - with a rise to £600k expected soon. They seem to have used a method in line with the BoE inflation calculation.  

Using this same method would indicate the deminimis is due to rise to at least £15k - and this would make a massive difference to many people.

So what is this limit and how does it work?

Any business that generates taxable and exempt income for VAT purposes is deemed to be partially exempt. This means they must perform calculations to determine how much VAT they can claim back.

1️⃣ VAT is a supply chain tax - so where you incur VAT on costs that directly relates to onward taxable supplies (those at 20%, 5% or 0%) then you can claim this in full.

2️⃣ Where you incur VAT on costs that directly relates to onward exempt supplies - this is likely irrecoverable.

3️⃣ The general costs that are neither one or other go into 'the pot' and you can claim part of the VAT, typically using an income-based ratio.

Still with me? Good, here's the point... ordinarily the exempt VAT is blocked from recovery. But if it's less than £7500 per annum and less than 50% of the total VAT incurred on all costs, then you can claim it back as deminimis.

If they raise this to £15k+ then this would simplify VAT for many, and would mean thousands more businesses each year would be entitled to full VAT recovery.