Value Added Tax is the tax that we all pay when we make a purchase, from Vehicle Fuel to Mobile Phones to Plant and Equipment, chances are if you are in business you will be impacted by it at some point.
There are 3 rates of VAT and a 4th option which is VAT Exempt.
- Standard Rate (20%) this rate applies to the majority of goods and services such as Computer equipment and Office Stationery.
- Reduced Rate (5%) this applies to Children’s Car Seats, Home energy & some Mobility Aids
- Zero Rate (0%) most foods, books & newspapers and children’s clothes are included
- Exempt – the supply of these items are not under the VAT system, this includes postage stamps and financial and property transactions
If you are in business, you supply Taxable items and have a Taxable turnover in excess of £85k then you must be VAT Registered! If however you have a turnover less than £85k it could still be beneficial for you to register as it gives you the ability to reclaim VAT you have paid on your purchases.
It is worthwhile getting more advice from an Accountant on VAT matters.
Just Registered for VAT but been in Business some time?
If you have just registered for VAT but you have been in business for some time you may be able to recover some of the tax paid on your purchases prior to your registration, there is however a time limit on this – speak to an Accountant for advice.
Once you are VAT registered you must submit a VAT return, even if you have no VAT to pay or reclaim, for that particular period.
VAT Standard Accounting Scheme
The standard VAT scheme is a quarterly submission and payment, due 1 Calendar month and 7 days after the end of your quarterly accounting date. The majority of businesses fall into this scheme.
Your VAT liability is the difference between the VAT on your Sales Invoices (output tax) and Purchase Invoices (input tax) dated within your quarterly accounting period. This is regardless of whether or not they have already been settled with payment.
VAT Annual Accounting Scheme
You can only join this scheme if your estimated taxable turnover is £1.35m or less.
You make advance payments (monthly or quarterly) towards your VAT liability through the year, and at the end of the year prepare a submission and pay any balance required or apply for any refund due. The annual submission and payment is due 2 months after the VAT period end date.
This can save on administration costs since you are not required to complete 4 submissions each year. However if you generally receive a refund this scheme would not be right for you as you only receive the refund at the end of the year.
VAT Cash Accounting Scheme
Similar to the Annual Accounting Scheme you can only join this scheme if your estimated taxable turnover is £1.35m or less.
A quarterly return and payment are required but instead of basing your tax liability on the date of the invoices, the liability arises based on the date of the payment of the invoices. So if you are not paid by a customer for 3 months, your VAT liability is delayed also by 3 months. The down side is that you can’t reclaim VAT on purchases until you actually pay for those purchases.
This scheme is beneficial for businesses that have long lead times before receiving payment from their customers.
VAT Flat Rate Scheme
To join this scheme your taxable turnover must not exceed £150k.
This scheme differs significantly from all the others, as what you pay over to HMRC is a flat rate (dependent on your business area) and not a calculation of the difference between your input and output tax. You retain the VAT that your customers have paid to you but you can’t reclaim any VAT back on purchases you have made.
With the Flat Rate Scheme there is a significantly lower administration burden as the liability is simply calculated as a percentage of your taxable turnover. You must still produce VAT invoices for your customers however you do not have to retain VAT invoices from your suppliers for VAT purposes (you do however need to retain supplier invoices for book keeping purposes).
VAT officers can visit your business to inspect your VAT records and make sure you’re paying or reclaiming the right amount of VAT. HM Revenue and Customs (HMRC) usually contact you to arrange a visit and will normally give you 7 days’ notice.
In summary there’s a lot involved in the decision of whether or not to register for VAT and which scheme to join. This is an area where a good Accountant could advise you and result in saving thousands in tax over the years.
The rates and thresholds quoted in this article are correct at the time of writing.