Should I be registered for VAT?
VAT (Value Added Tax) is a vast subject. Although the basic VAT principles are relatively easy to understand, when a business registers for VAT, it enters a new phase which will affect its procedures and the way business itself is conducted. A business registered for VAT must keep accurate records of income and expenditure, it must account for all VAT paid and collected and it must ensure that VAT Returns are accurate and prepared within a precise timescale.
Generally speaking you need to register for VAT, or you may chose to register voluntarily, if you are doing any of the following kinds of business in the UK:
- Supplying goods or services within the UK. If your turnover of VAT taxable goods and services supplied within the UK for the previous 12 months is more than the current registration threshold of £81,000, or you expect it to go over that figure in the next 30 days alone, you must register for VAT.
- Taking over a VAT-registered business from someone else. You have to add your own VAT taxable turnover over the last 12 months (if any) to that of the business you’re taking over. If the total goes over the registration threshold on the day of the takeover (currently £81,000), you’ll have to register.
- Receiving goods from other countries in the European Union (EU).If you have received goods from other EU countries in the UK (these are known as acquisitions) with a total value greater than £81,000 in the current year since 1 January, or you expect to acquire more than that value in the next 30 days alone, you must register for VAT. In some cases you may need to register to comply with VAT requirements in other countries.
What are the benefits of voluntary registration?
There are potential cashflow advantages of being able to charge VAT on your sales and claim back VAT on your purchases, which you may benefit from depending on your circumstances. For example:
- If you sell zero-rated items and buy standard-rated items you would receive a VAT refund from HMRC. An example of this would be a new build.
- If you wish to claim back the VAT on your purchases anyway, especially where you incur substantial costs. However, being VAT registered will make you less competitive if you sell your services or goods to private individuals who are not VAT registered (as opposed to another business).
Can I reclaim the VAT on goods purchased before registration?
You can generally reclaim VAT on capital items you still hold (such as equipment) you bought up to four years before you registered for VAT, and services and purchases you bought up to six months before you registered.
There are conditions you must meet in order to reclaim this VAT, including keeping specific records of what you bought and how you use, sell or dispose of them.
For this reasons the first VAT Return normally generates a Tax Rebate.
What VAT Methods are there?
There are several VAT Methods, the most common of which are as follows:
Standard VAT Accounting. This is based on an actual calculation of VAT incurred on expenses and charged on goods and services supplied. By using standard VAT accounting, you pay VAT on your sales whether or not your customer has paid you. With this method you must keep the following VAT records:
Cash Accounting for VAT. By using cash accounting, you do not need to pay VAT until your customer has paid you. If your customer never pays you, you never have to pay the VAT. You can use cash accounting if your estimated VAT taxable turnover during the next tax year is not more than £1.35 million. You can continue to use cash accounting until your VAT taxable turnover exceeds £1.6 million.
Flat Rate Scheme. The Flat Rate Scheme is designed to help small businesses by making it easier to record VAT on taxable sales and purchases. If you use the scheme, you normally apply a single percentage, based on your business activity, to your total flat rate turnover in a VAT period, and the result is the VAT you pay. HMRC publishes tables to show which rate is applicable to each type of business (please call the office for guidance)
Your flat rate turnover is all the income you receive, including VAT. You apply the percentage agreed to this figure. So if you are a builder and for the quarter you have income is £10,000 plus £2,000 VAT and your flat rate percentage is 14.5% your VAT will be £1,740 as follows:
£10,000 plus VAT = £12,000 x 14.5% = £1,740 VAT due
The real advantage of this scheme therefore is that the VAT due is based only on the turnover without any reference to the purchases made and this is why it is easier to record the VAT. (You can still claim for capital assets which individually cost, including VAT, more than £2,000)
With the flat rate you can calculate your flat rate turnover as follows:
– Basic turnover. This is the VAT inclusive total of the sales and supplies you’ve made in the VAT period.
– Cash-based turnover. This is the VAT inclusive sales and supplies you’ve been paid for in the VAT period.
There are some real advantages in using the VAT Flat Rate Scheme, please call the office for an informal discussion to see whether your business could benefit by using this scheme.
Margin schemes for second-hand goods, art, antiques, collectibles. Normally you charge VAT on your sales, and reclaim VAT on your purchases. However, if you buy or sell second-hand goods, works of art, antiques or collectibles you may be able to use a margin scheme. These schemes enable you to account for VAT only on the difference between the price you paid for an item and the price at which you sell it – your margin. There is no VAT to reclaim on the item you buy, and you won’t pay any VAT if you don’t make a profit on a deal. You can still use normal VAT accounting for other sales and purchases such as overheads.
Using a margin scheme will reduce the VAT you have to pay if you sell:
– second-hand goods
– works of art
– antiques, or
– collectors’ items
The idea behind the scheme is to enable you to recover the VAT on second hand goods which you have bought where the VAT is not separately shown. Here is an example:
|(a) Purchase price||£2,000|
|(b) Selling price||£2,500|
|(c) Gross Margin (b – a)||£500|
|*(d) VAT payable (c x 1/6 )||£83.33|
* The calculation of the VAT due depends on the VAT rate in force. You must not show VAT separately on your sales invoice.
Annual Accounting Scheme. Using the Annual Accounting Scheme, you pay VAT on account throughout the year in nine monthly or three quarterly instalments. These instalments are based on the VAT you paid in the previous year. If you have been trading for less than a year, the instalments are based on an estimate of your VAT liability.
You only need to complete one VAT Return at the end of the year. If you have not paid enough VAT on account you make a balancing payment to HM Revenue & Customs (HMRC). If you have overpaid, you claim a refund from HMRC.
This scheme makes life a lot easier in that there is less paper work to complete and more importantly you only need to carry out a yearly reconciliation of your VAT account when it is time to submit your yearly VAT Return. Making specific payments in advance can assist in better managing your cash flow. However, your accounting records must be kept in good order at all times as indicated in the section above.
Annual accounting is not suitable for businesses that regularly reclaim VAT as you would only get one repayment at the end of the year.
Please bear in mind that if your turnover decreases, your interim payments may be higher than under the standard VAT accounting, Therefore it would not be advisable to use this scheme.
The accounting records you must keep may vary somewhat depending on the VAT scheme you select. The following is a list of all the records which, whenever possible, you should keep. This is because although VAT requirements change (as described above), in practice these records are also needed to prepare your final accounts.
– Copies of all sales invoices you issue.
– All purchase invoices for items you buy.
– All credit notes and debit notes you receive.
– Copies of all credit notes and debit notes you issue.
– Any self-billing agreements you make as a supplier.
– Copies of self-billing agreements you make as a customer and name, address and VAT registration number of the supplier.
– Records of any goods you give away or take from stock for your private use including rate and amount of VAT.
– Records of any goods or services bought for which you cannot reclaim the VAT, such as business entertainment.
– Any documents dealing with special VAT treatment, such as reliefs or zero-rating by certificate.
– Records of any goods you export.
– Records of any taxable self-supplies you make – for example if you sell cars and you use one of your cars in stock for business purposes.
– Any adjustments such as corrections to your accounts or amended VAT invoices.
Every business has different circumstances. It is important therefore to speak to us in order to discuss your specific requirements. Using the correct system will aid your cashflow and in some cases actually generate a Tax Advantage.