02 Apr VAT Guide for Beginners
Most purchases carry a VAT charge. Levy Value Added Tax (VAT) on most business transactions and on many goods and some services.
There are three rates of VAT in the UK:
- 20% (the ‘standard’ rate).
- 5% (‘reduced’ rate) and
- 0% (‘zero’ rate).
You’ll register for VAT if any of the following apply:
- The taxable turnover of your business in the previous 12 months reaches the VAT registration limit. It’s between £85,000 from 1/4/2017. Although you can also register on a voluntary basis if your turnover is below this.
- You believe your turnover in the next thirty days will exceed the registration limit.
- Take over a business as a going concern. The turnover meets the conditions of the previous two points.
- You buy goods from elsewhere in the EU to a value above the registration limit in one calendar year.
There are penalties for failing to register on time.
Taxable supplies are goods and services liable to VAT. Once registered you must charge VAT on all taxable supplies.
VAT is not applicable to everything. Supplies not subject to VAT exempted. These include insurance, financial services, postal services, health, and education. Exceptions lie in every category.
The amount of VAT payable to Revenue and Customs is the difference between your output tax on your sales. Your input tax on your purchases also qualifies. If input tax is greater than output tax, a refund is undeniable. VAT is payable each quarter following the submission of a VAT return. Under certain schemes, expect to pay monthly.
Should you register?
You must, if your taxable turnover is below £85,000 ( between April 2017). You don’t have to register but you’re eligible to apply for ‘voluntary registration’.
There can be advantages in registering such as…
- Increased business credibility;
- Count on potential savings if your supplies are zero-rated. You can still reclaim VAT on purchases.
- Potential savings if you supply other VAT registered businesses. Count on these to have VAT charged on these. and you can then still reclaim VAT on your purchases.
Weigh against the hassle factor, and complete VAT returns every quarter. If you supply the general public, you want to register as this puts your prices up by the rate of VAT.
There are various VAT schemes, mainly for small businesses…
- Cash accounting – You can arrange to account for VAT on the basis of cash received and paid if your taxable turnover is under £1,350,000 a year. Instead of waiting for ab invoice date or time of supply.
- Annual accounting – You can complete one VAT return per year rather than four if your turnover is under £1,350,000. You must also make nine payments on account throughout the year. A balancing payment with the VAT return is also inevitable.
- Flat rate scheme – This is for businesses with a turnover of under £150,000. It saves on administration. You have to pay a set percentage of your VAT. This includes turnover based on your business sector rather than accounting for VAT. This excludes any “in and out”. It can also reduce the VAT you pay in some situations.
- Retail schemes – These apply to retailers and offer an alternative. It’s not practical to issue invoices for a large number of supplies direct to the public.
VAT Annual Accounting
you complete one VAT return per year instead of each quarter.
The advantages of using the scheme are that…
- You’ll need one VAT return per year and you have two months to complete it.
- Get regular cash flow regular monthly payments.
- You can choose the VAT return year that you want.
It is usually necessary to make nine equal interim VAT payments. All you need is a direct debit at monthly intervals during the year. The amount of the interim payments depend on an estimate of your total VAT liability. Your previous 12 months net payment of VAT. Count on a balancing payment when you file an annual return. You can also apply for quarterly payments that are 25% of the provisional VAT liability.
You do have to be careful not to build up a large unexpected balancing payment. The checks you check your total VAT liability over the year. An annual accounting scheme is not good for any business with regular repayments of VAT. You’ll need a year to get your money.
To qualify to use the scheme…
- You can join at any time after registering for VAT if your taxable turnover exceeds £1,350,000.
- You’re not part of a VAT group or a division company.
You can continue to use the scheme until your annual taxable turnover reaches £1,600,000.
VAT Cash Accounting
You account for the cash accounting scheme on the basis of the payments you receive and make.
You don’t have to pay VAT on the invoices issued until your customers pay you. Although it also means you can’t reclaim VAT on purchases until you pay your suppliers. You get automatic bad debt relief because, when you don’t receive a payment, no output tax is due.
Who can use the scheme?
You can choose this scheme if you expect the value of your taxable supplies (excluding VAT) during the next year (beginning at the start of a tax period) will not exceed £1,350,000 and…
- You have sent in all the VAT returns due at the time you start to use the scheme;
- You’re not convicted of a VAT offense in the last year;
- You’ve not received a penalty for VAT evasion. The focus lies on the ones involving dishonest conduct in the last year
- You don’t owe any VAT. You’ve made arrangements with revenue and customs clear the number of your outstanding VAT payments. These include surcharges and/or penalties);
Use the scheme until its annual taxable turnover reaches £1,600,000. Use the cash accounting basis for a further six months. This accounts for any VAT outstanding on supplies made and received to use the scheme. or you can account for all the outstanding VAT due in the period you stop to use the scheme. Account any VAT still outstanding at the end of the six month period. for on the VAT return ending then.
You don’t need to apply to use this scheme, and you can change to it at the beginning of any tax period. You must make sure you don’t account for VAT twice on any supplies made. This happens when
your business is already registered for VAT. Once started off, please make sure you don’t account for VAT twice on any supplies made. You cannot apply the cash accounting scheme to your business.
Use the cash accounting scheme with the annual accounting scheme. The flat rate scheme works for small businesses.
VAT Flat Rate Scheme
Design a VAT flat rate scheme to make it simpler and quicker. This helps small businesses complete their VAT return.
Calculate VAT payable to HMRC for a particular percentage of the gross turnover of the business. and not as the difference between the VAT on individual sales and purchases. There’s no need to record the VAT incurred on most purchases. Determine whether it is reclaimable or not, so there is less chance of error. The amount of VAT charged to customers remains the same whether using the flat rate scheme or not.
Some businesses pay less VAT by using the scheme. Some may pay more by using it as the percentages used on the average VAT. Pay this by particular trade sectors. It is important to calculate the financial effect before applying to use the scheme.
The Flat Rate Scheme Calculation
These are the steps in the calculation…
- Establish VAT returns by multiplying the VAT-inclusive turnover. Used a fixed percentage to determine the sector in which the business operates. This goes in Box 1 on the return.
- Whether standard, reduced, zero-rated, or even exempted, turnover includes the taxable supplies. It’s the grossed turnover.
- There are exceptions for any VAT on purchases before the business. That’s the date when you register for a business. VAT and on a single capital asset that costs over £2,000 inclusive of VAT can. The VAT on these goes in Box 4 as usual and the net amount of the purchase in Box 7.
So if for example your gross turnover comes to £20,000 and the percentage for the sector is 10%, the VAT due is £2,000. If what you purchased was a capital asset for £3,833 including £500 of VAT, then the VAT payment due would be £1,500.
To qualify to join the scheme…
- A business must have a taxable turnover, excluding VAT, of no more than £150,000 a year. Taxable turnover is the total value of supplies or sales made by the business. It’s liable to a VAT whether at standard, reduced or zero rates. This excludes any expected sales of capital assets.
- A business must not already use second-hand goods. Neither the tour operators nor retail schemes.
- The business won’t use capital goods scheme for certain capital items.
- A business is not guilty of a VAT offense in the past year. It’s also never associated with another business or registered as part of a VAT group in the past 2 years.
A business must apply to join the flat rate VAT scheme. It can leave whenever it chooses by informing HMRC in writing.
From April 2017, the government will introduce a new 16.5% rate for businesses with limited costs. Many businesses. It levels the playing field for the accounting simplification for small businesses. that use the scheme as intended
The Business Sector Flat Rates
Different business sectors must use their own flat rate.
A business may choose its sector on the grounds to describe its main trading activities. If the trading mix changes, so say the majority of the turnover comes from supplying restaurant meals. The alcoholic drinks the trade sector. This changes from ‘Pubs’ (6.5%) to ‘Catering Services’ (12.5%). The change in the sector should be made from the start of the VAT period that contains the anniversary of joining the scheme.
It is advisable to set out in writing why you made the selection of the trade sector.
1% Reduction in First Year of VAT Registration
In your first year of VAT registration, there is a 1% reduction in the flat rate that is applied to your turnover. The reduction is for the 12 months following the date of VAT registration and not the date of joining the flat rate scheme. There is no entitlement to the 1% reduction if you register for VAT 12 months after you were required to register.
A Trap in the Flat Rate Scheme
Apply the flat rate must to all business income. This includes rents and sales of assets. That’s where VAT was not reclaimed. They include cars or property, but not interest received from business bank accounts. This means you pay VAT on the gross receipts of sales on which you have not collected any VAT.
If you’re a sole-trader the flat rate is to any letting income you receive in your sole name, as lettings are regarded as a business for VAT purposes. Lettings are undertaken as a partnership, perhaps jointly with your spouse, are not counted as part of your sole-trader business income. When you sell a let property the flat rate should be applied to the total proceeds. You can withdraw from the flat rate scheme before you sell a high-value item such as a property, but you have to stay out of the scheme for at least 12 months.
How We Can Help You
We can assist you with…
- Registering for VAT – VAT Accountants
- Advising on the suitability of VAT schemes
- Assisting with completion of VAT returns
- Setting up your accounting system to deal with VAT
- Representing you in any disputes with HM Revenue & Customs
- Providing VAT planning advice for complex transactions such as when buying property.
Disclaimer:A lot of information about the article is from the HMRC website.