It is an accepted fact that a business must have regular transactions to be VAT registered and therefore eligible to recover VAT on their costs. HMRC has been reviewing this in light of some recent European cases ...
They only had one activity at the time, and that was cutting and baling hay which it then sold exclusively to the main director for use in another business. Income was only £440 per year; however, the company claimed input VAT of £19,000 for building a barn to house its equipment.
HMRC decided that Babylon Farm Limited no longer had enough business activity and disallowed the VAT recovery. This decision has now been supported on appeal by the Upper Tribunal.
There were a number of reasons for the tribunal to side with HMRC, including the company having no staff, no insurance and no evidence to prove it owned the hay it was selling to the director's main business as the land already belonged to him, so how could they sell it to him? Other factors included a lack of invoicing and a disparity between the cost of a new barn and the VAT reclaimed on it.
So, what does this mean? Well, a small amount of regular taxable income may now not be enough to support a business's continued registration for VAT. If you have a business just ticking over while you concentrate on other things, you may want to speak to your accountant as HMRC wonder why it's earning so little and claiming so much.
I'd suggest taking steps to review each of your businesses to ensure they still qualify for VAT registration. In light of the Babylon Farm case, I'd suggest you do this sooner rather than later, as you don't want HMRC to start a VAT investigation into your activities.
If you feel inspired to find out more about anything I've said here, do call me on 01908 774320 or leave a comment below and I'll be in touch as soon as I can.