To some, VAT is a mystery and many business owners really get to grips with this tax. However, it useful for every business owner to know the basics, and for most that will be enough. If you’re a property investor or developer, a lot more knowledge than the basics is required and this blog is not aimed at you but at the small to medium sized business owner.
VAT - value added tax – is a tax levied on sales of goods and services and not all businesses need to register for VAT (see below). If you are VAT-registered:
- You pay VAT on the items or services you buy from other business.
- You charge VAT on the items or services you sell to other businesses and customers (if you are VAT registered).
- The idea is the VAT you pay and the VAT you charge roughly equals out – if it doesn’t, you level the balance with HMRC. That’s what your VAT return is for (see below).
When do you need to register for VAT?
- You must register if your turnover in the past 12 months was more than £81,000 (the ‘VAT threshold’ – for the tax year 2014/15).
- However, you can ask HMRC for exemption from VAT registration if you can show that your turnover has only temporarily risen above the VAT threshold and that it will fall back below the VAT deregistration threshold (£79,000 from 1 April 2014). If you register, you can deregister later if you can show HMRC that your taxable turnover will fall below the threshold.
- VAT registration is also compulsory if you expect your taxable turnover to exceed the VAT threshold (£81,000 for the tax year 2014/15) in the next 30 days alone.
- For some small businesses, it can be beneficial to register even if your turnover is less than £81,000 if:
- You buy many more items that charge VAT than you sell (as your input tax will be higher than your output tax, and HMRC will reimburse you the difference.
- You think your turnover will soon be over the threshold and want to get the paperwork out of the way now.
- You want to seem more professional or assure customers you are a legitimate business, certified by HMRC.
How much is VAT?
- There are three different rates:
- Standard rate: 20% from 4 January 2011 onwards.
- Reduced rate: 5 %
- Zero rate: 0%
- Most items are standard rate unless they specifically say otherwise.
- Reduced rate applies to certain items such as domestic fuel and power, installation of energy-saving materials, sanitary hygiene products and children’s car seats.
- Zero-rate applies to certain items such as food (but restaurant meals or takeaways), books and newspapers, children’s clothing and shoes and public transport.
- Certain things are exempt from VAT, such as insurance, providing credit, education, fund-raising events by charities, membership subscriptions and most services provided by doctors and dentists.
- Check with HMRC if you think your items or services may be reduced or zero-rate or exempt.
How you work out VAT
- You have to charge VAT on every sale you make to other business or customers – in other words, you have to add it to the price.
- You do that by multiplying the cost by the VAT rate percentage, then adding that to the cost of the item or service.
- You separate out VAT on receipts, showing the cost (before VAT), the cost of VAT and what rate it was charged at, then the total.
- Most businesses calculate VAT backwards from what they want the total cost to be, to make the total cost a round number.
- You have to keep records of all VAT transactions. That’s VAT you’ve charged on sales and VAT you’ve been charged on purchases.
VAT returns and how you pay VAT to HMRC
- UK VAT-registered businesses complete a VAT return for each VAT period. VAT periods are typically quarterly, though you can ask for a non-standard VAT period. For example, a business that regularly reclaims VAT from HM Revenue & Customs might boost its cash flow by completing monthly VAT returns. UK businesses can also ask for quarterly VAT periods that match their financial years. Smaller businesses can simplify their VAT accounting by opting for the annual accounting scheme (see below).
- Your VAT return summarises all the transactions that took place during that VAT period. For VAT purposes, the transaction date is determined by the ‘tax point’. The tax point is normally, but not always, the date on the VAT invoice. However, if:
- there is no VAT invoice (e.g. with typical retail sales), the tax point is normally the date of supply
- payment is made in advance, the tax point is the earlier of the date of payment and the invoice date
- the VAT invoice is issued more than 14 days after the date of supply, the tax point is the date of supply
- There are special tax point rules for situations such as part payments, in some industries and for some VAT accounting schemes. You may want to take advice to ensure you understand what tax point to put on VAT invoices you issue and what to include in your VAT return.
- Online VAT returns are due one month and seven days after the end of the VAT period. Payment of any VAT owed is due at the same time, although HMRC will collect direct debit payments three days later. Different deadlines apply to the annual accounting scheme and for larger businesses which must make payments on account.
VAT Accounting Schemes
Flat rate VAT accounting scheme
- The flat rate VAT accounting scheme simplifies your VAT returns. Under this VAT accounting scheme, you simply calculate the VAT due to HM Revenue & Customs (HMRC) as a percentage of your turnover rather than paying the difference between the actual VAT you have charged and paid.
- The flat rate used depends on your industry, but you should end up paying HMRC the same amount of VAT as if you had carried out the full VAT calculation. There is a 1% discount on the flat rate VAT if you use the scheme during your first year of VAT registration.
- You are only eligible for this VAT accounting scheme if your estimated taxable turnover in the next year will be no more than £150,000. Once you are using the scheme, you can continue to do so until your total business income exceeds £230,000.
VAT cash accounting scheme
- Normally, VAT returns are based on the tax point date (usually the same as the VAT invoice date) for your sales and purchases. This may mean you can end up having to pay HMRC the VAT due on sales that your customers have not yet paid for.
- The VAT cash accounting scheme instead bases the return on payment dates, both for purchases and sales. You will need to ensure your VAT records include a record of actual payment dates.
- You are only eligible for the VAT cash accounting scheme if your estimated taxable turnover is no more than £1.35m, and can then stay in the scheme as long as it remains below £1.6m.
Annual accounting scheme
- The annual accounting scheme allows you to pay VAT on account, in either nine monthly or three quarterly payments. You then complete a single, annual VAT return which is used to work out any balance owed by you or due from HMRC.
- Again, this simplifies your VAT paperwork. You are only eligible for the scheme if your estimated taxable turnover is no more than £1.35m, and can then stay in the scheme as long as it remains below £1.6m.
- If eligible, you may be able to combine the annual accounting scheme with the flat rate VAT and VAT cash accounting schemes.
Retail and VAT margin schemes
- Various retail schemes exist to simplify VAT. The right scheme for you depends on whether your retail turnover (excluding VAT) is below £1m, between £1m and £130m or higher.
- Smaller businesses may be able to use a retail scheme with cash accounting and annual accounting. You cannot combine a retail scheme with the flat rate VAT scheme, but retailers can choose to use the flat rate scheme instead.
- Separately, there are VAT margin schemes for businesses that deal in second-hand goods, art or similar goods, as well as a special tour operators’ margin scheme.
- As with flat rate VAT and VAT cash accounting, you may want to take advice to see which accounting schemes would best suit your circumstances.
Sharron Fletcher, Partner at RAE Business & Property, contact on 07587 709008 or email firstname.lastname@example.org