If the company is making no sales at all, but it is still incurring costs, HMRC may refuse to repay VAT incurred on purchases on the grounds that there are no business activities.
The six tests HMRC often use to decide if the trader is engaged in business activities for VAT purposes are known as the Lord Fisher tests, (see VAT manual at VBNB22000).
The Fisher tests were considered in the case of Babylon Farm Ltd. The company had been VAT registered since 1991, and had run an extensive farming business. However, in the three years to May 2017 it made only one zero-rated sale of £440, and that was to one of the directors.
In that period the company claimed input tax of £19,765 incurred on the purchase of equipment and the construction of a barn. HMRC successfully argued that the company “was not predominantly concerned with the making of taxable supplies for consideration”, and the input tax claim was disallowed.
Babylon Farm could have deregistered for VAT on the basis that it no longer had an intention to trade. That would have triggered an output tax liability on the equipment held at deregistration date, but the building work on the new barn would have fallen under the land and property threshold for the capital goods scheme for VAT (£250,000 excluding VAT).
If our client is experiencing zero or very low sales, but it doesn’t want to deregister from VAT because it thinks sales may pick up again, it could join the flat rate scheme (FRS). This allows the business to stay within the VAT system, retain its VAT number, but not reclaim input VAT while it is within the scheme.
A business can join the FRS at the beginning of the VAT period after it submits its FRS application, unless HMRC agree an earlier date. However, it can leave the FRS on any day, even in the middle of a VAT period. Check VAT Notice 733 for the FRS qualification conditions.
Written by the Tax Advice Network