Struggling with zero-rated supplies and sales

Hi, I really hope to get some expert help. I run a small magazine publishing business. We have a large turnover and are VAT registered, but make very little profit due to production and postage costs. Our main costs are magazine printing (zero-rated VAT supply) and Royal Mail postage (exempt, or possibly also zero-rated?). Hardly anything we buy has standard VAT on it that can be claimed back. I've read many forums and blog posts such as this one, that give hope that there is some way to claim VAT (or any kind of relief at all) on our zero-rated supplies: https://blog.pleo.io/en/zero-rated-vat Quotes such as: "A zero-rated VAT item is an item that falls within the VAT scheme but the VAT charge is 0%. So reclaiming VAT on zero-rated supplies is still an option if you’ve bought things necessary for your business that year." And other websites also state about partial exemption, and how relief under de minimis upto £7,500 can be used. Like this one: https://www.taxadvisermagazine.com/article/partial-exemption-vat-registered-businesses It's very complicated - and I've spoke to my accountant for advise. His stance is that if you buy supplies zero-rated (even if you sell them also zero-rated) you simply cannot claim back any VAT or relief at all. I just have to pay the VAT on my turnover regardless. This seems very unfair if this is the case? Surely if I'm selling goods zero-rated, and also not charging VAT to my customers on postage either, there is something we can do? HMRC taxing VAT on my turnover of zero-rated and exempt supplies and sales means I have no chance to keep the business going long term. Thanks for any help and support. Even if there are any small allowances we can somehow benefit from, please advise.

Zero rate is a rate of VAT, a seller who zero rates their sale (such as printed matter) is making a taxable (VATable) sale, that sale is subject to VAT, it just so happens to be the rate of VAT is zero percent. Zero rate is entirely different and not the same as "not charging VAT". Partial exemption relates to a business which makes both taxable supplies (zero, reduced, standard) and also exempt supplies (welfare, insurance, finance, etc). With zero rate, you are charging VAT, albeit at 0% and you are entitled to reclaim your input tax on costs...because you are charging VAT, you are making a taxable (VATable) supply. With exempt sales, you are not charging any VAT at all, and because no VAT is being charged then you are not entitled to reclaim any input tax on your costs. A partially exempt business, which makes both VATable/taxable sales and exempt sales has to perform a partial exemption calculation to adjust what amount of input tax they can reclaim. In terms of expenditure then, if you buy in goods which are zero rated or exempt then there is no VAT for you to reclaim. For example, you buy a pack of stamps for £5 from the Post Office, this purchase is exempt because postage stamps are exempt, Post Office is not charging any VAT on these stamps and so there is nothing for you to reclaim either. You cannot reclaim VAT on purchases where VAT was not actually charged by the supplier/seller. But are you sure "hardly anything we buy is standard rated?"....Do you not buy in plain paper, card, inks and dyes? These would usually be standard rated purchases. Do you have a printer in the office? Do you have a cutting machine that trims paper? These machines will be standard rated when you buy or lease them. You should be able to reclaim the VAT on these purchases as long as you have a VAT invoice from the supplier and the invoice clearly shows net, VAT, gross on the invoice. In your quote "A zero-rated VAT item is an item that falls within the VAT scheme but the VAT charge is 0%. So reclaiming VAT on zero-rated supplies is still an option if you’ve bought things necessary for your business that year." what that is saying is what I've stated earlier, zero rated sales allows you to reclaim input tax on purchases related to the zero rated supplies (sales) you have made, but of course you have to actually incur input tax/be charged VAT by your suppliers in order to reclaim VAT. I'd have thought a typical printer business would be in a refund position most quarters as there is no output tax due to HMRC (all sales zero rated) and any input tax on purchases is recoverable. Your Accountant appears to be correct in saying that you cannot reclaim VAT on purchases which are zero rated. How can you reclaim VAT when there is no VAT showing on the purchase invoice? I suggest you go back to your Accountant and ask them to explain in more detail as to what VAT your business can reclaim. To reiterate, you can only reclaim VAT where it has been incurred/charged by a supplier and shown on the suppliers invoice. the partial exemption £7,500 you refer to is saying a partially exempt business can reclaim input tax in full if it is under the £7,500 threshold but that business still has t incur VAT being charged to it by suppliers. if the business buys all of its goods and services from non VAT registered traders, then a partially exempt business as no input tax to reclaim at all, the £7,500 is irrelevant as there is no VAT being incurred by the business. saying you can reclaim VAt if it is under £7,500

Hi thanks for your detailed reply. And excuse my ignorance and lack of understanding when it comes to purchasing exempt and zero-rated supplies. I've always just paid whatever I've been told to, and never really questioned things until we've really started to struggle recently with postage and printing prices rising. So if we forget the exempt postage for now and ignore that one - I'm clear that exempt simply means you just can't claim any relief. Just to clear things up, we're not actually a printers. We're a publisher. So we pay writers (who are freelance and aren't charging us VAT because they're self-employed) and we're paying a printer to print our magazines. Which we then sell zero-rated. Is there no way to claim anything back from our cost of print production? We receive an invoice with zero-rate VAT on each month which we pay, and then we sell on to the customer zero-rated also. Certainly we have bits and bobs and merchandise etc that we do pay standard rate VAT on to our suppliers, and I send those receipts on to our accountant every time I make a purchase in order for him to claim the VAT back. However, this doesn't seem to be enough when faced with our very high turnover... Is there no input cost that can be claimed at all on the zero-rated supplies?

Thanks for clarification as to you being a publisher. You can't reclaim VAT on zero rated purchases. If your writers are not VAT registered or your suppliers are zero rating supplies to you, then what VAT are you expecting to reclaim from them? They haven't charged you any VAT. Put another way, you seem to be asking how you can reclaim VAT on purchases where none of your purchases have VAT on them.. You could consider the flat rate scheme if your turnover is under £150k, else it does not seem that VAT is the problem here and instead it is one of income vs expenditure. If you are not making a profit, it will rarely be to do with VAT. If you bought something for £10 no VAT, the cost to you is £10. If you bought something for £10 + £2 VAT and you reclaim the £2 VAT, the cost to you is still £10. VAT has made no impact whatsoever on your costs. If you then sell the thing for £20, your cost is £10 and your sale price is £20 and your profit margin is £10. So if you are struggling to make money, the issue is more likely either the cost of goods is too high or your prices are too low or some other business related matter, the VAT is unlikely the issue here.

Hi HMRCforumshandy I note You have said ‘HMRC taxing VAT on my turnover of zero-rated and exempt supplies’and ‘I just have to pay the VAT on my turnover regardless, VAT is not a tax applied to turnover or even profit, so as previously advised as a VAT registered business you can reclaim VAT you have paid but must then charge it on your sales, you then give any VAT collected to HMRC. So then net effect on your profits is nothing. If items have no VAT charged or are zero rated at both purchase and sale then as you have paid no VAT nor charged any VAT there is nothing to reclaim or therefore pay to HMRC. You should talk to your accountant again to see what taxes you are actually paying, if any, if your business is not profitable.

OK thank you. Usually we manage to pay our bills fine and either make a small yearly profit or loss, but pay our staff and never have any debt. I will talk more to my accountant as to why they're predicting higher VAT/taxes than we normally have, they're still working on our return and I know they've had a few software problems etc - so my hope is they can iron this out. Thanks for clarifying everything.

Hi,

If you make taxable supplies and incur VAT in the course of your VAT registered business then you can generally recover the VAT incurred as input tax. Please see the guidance below:

Introduction to input tax

Zero rated taxable supplies which you make are still taxable supplies and so you are eligible to recover VAT on your purchases, subject to the rules of input tax above.

If you do not incur any supplies at the 20% rate of VAT then obviously there will be no VAT to recover.

Thank you.