Here is a short guide to VAT and when to register.
What is VAT?
VAT is short for ‘Value Added Tax’. It’s a tax on the sale of most goods and services. Registration for VAT is compulsory when the annual turnover of your business, calculated to the end of any month, reaches the VAT registration threshold of (currently) £85,000.
If your turnover is close to this figure and you think it may reach the threshold you have to register as soon as this happens. Do not make the mistake of waiting until the end of a calendar quarter, or until your annual income tax return is due.
You should also register if you expect that your turnover will exceed the threshold in the next 30 days – and this period can start at any time.
What happens if I do not register?
If you fail to register for VAT at the appropriate time you will be liable to a penalty. This is calculated at 5%, 10% or 15%, depending on the delay between the date of hitting the threshold and the date which HMRC received registration notification.Up to 9 months delay incurs a penalty of 5%, then up to 18 months is 10% and over 18 months is 15%.
Can I register for VAT even if my turnover is lower?
Yes, and this can be advantageous.
Some of the main advantages are:
Registering and having a VAT number may help give your company the appearance of being larger than it is. Some companies insist that suppliers must be VAT registered and you can claim VAT back on items purchased.
If you want to register despite not reaching the threshold, you can make a voluntary registration. You may need to satisfy HMRC that you are carrying on a business, or intending to carry on a business, and that you are making what is known as ‘taxable supplies’ e.g. selling products or services on which VAT could be applied.
When do I start charging for VAT?
You start charging on the day you register for VAT. Do not wait until you receive your certificate; it can take up to 30 days for this to arrive.
Whilst waiting for your VAT certificate, you will need to raise your invoices as a total figure, which includes the sale amount and the VAT amount.Then, once you have received confirmation of you VAT number, you can add this to your invoices, separate the sale and VAT amounts, and re-issue to your customers; who will then be able to claim the VAT which you have charged.
Standard VAT scheme
If you have elected to use the standard method of accounting for VAT, the return must show all your ‘output’ tax i.e. the total VAT your company has charged your customers on products and services which you have provided. It must also include the VAT you wish to claim back against charge you have incurred on purchases for your company, such as supplies, equipment and stock. This is known as ‘input’ tax. The key thing to remember is that the VAT return must include all income invoices during that quarter, not income received – even if you do not get paid for 30 days or more afterwards. Once the VAT form is submitted, HMRC will then review it. Should your outputs exceed your inputs, you must then pay the difference to HMRC. However, if your inputs exceed your outputs, your company is entitled to a refund.
Flat Rate VAT scheme
The Flat Rate VAT scheme is a simplified way to account for VAT. HMRC have introduced a new higher rate (16.5%) for business where goods cost less than 2% of turnover or £1000. This has removed the advantage of the flat rate scheme for some businesses.
However, you should be aware that if your annual turnover exceeds £230,000 per year then you are not eligible for the Flat Rate VAT scheme.
The way the Flat Rate scheme works, is that you charge VAT on your invoices at 20% but only pay back HMRC at a lower rate; typically, 12% or 13%. This rate differs depending on your profession or trade. A table of business types and rates can be found on HMRC’s website.
In your first year as a VAT registered company, when using the flat rate scheme, you receive an extra 1% discount for the year.
Companies on the Flat Rate scheme are unable to claim back any VAT on purchased goods and expenses for their business. You can however reclaim VAT on capital asset purchases over £2,000, for example on a PC and printer, providing the capital purchases are on the same receipt. You cannot, however, buy these items on separate months and then file them together; they have to be on the same receipt.
The Flat Rate scheme still requires you to complete a quarterly VAT return form. As mentioned, you will need to charge the standard VAT rate on your invoices, but when you complete the form you calculate your VAT payable as the relevant percentage of the amount you have invoiced that quarter – including the VAT.
So, for example, if you have invoiced £10,000 VAT in a quarter, you must calculate your payment as 13.5% of £12,000, not 13.5% of £10,000. Can generate extra income through paying less VAT than you charge A massively reduced amount of paperwork for you to handle An extra 1% reduction in your first VAT registered year Flat Rate scheme disadvantages If you buy lots of stock or other item for your business, then you cannot claim the VAT back on these.
The Cash Accounting Scheme
The cash accounting scheme is as its name implies; based on the amounts received and paid.
You cannot claim or reclaim VAT on purchases or services that have not yet been paid for. So even though an invoice was raised in January, if the payment was not received until April, then you would not include this in your VAT return for the quarter ending in March. Instead this would be included in your quarter ending in June.
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