One of the most frequently asked questions in X-Forces training, workshops and coaching is, what do I need to understand about VAT?
In this month’s blog Clive from ICAEW and our Director Vin Murria, outline the key considerations, requirements and best sources of advice for a small business.
Compulsory VAT Registration Threshold
You must register for VAT if your turnover exceeds £83,000 in the previous 12 months (for 2016/17 tax year). You can voluntarily register at any time (if turnover is below compulsory registration threshold).
• must charge VAT on their goods or services
• may reclaim any VAT they’ve paid on business-related goods or services
Businesses that sell only VAT-exempt goods and services can’t register for VAT.
How does VAT work?
VAT is added to sales invoices and purchase invoices will have VAT added if a supplier is VAT registered. VAT invoices must have all the required information on them e.g. VAT registration number. Most items incur VAT at the standard rate (currently 20%) but some items are chargeable at the reduced rate of 5% or are zero-rated (0%)
The basic system is that, every three months, a VAT return is submitted on-line to HMRC. Output tax (on sales) and Input tax (on purchases) are netted and the difference – usually with outputs exceeding inputs – is paid over to HMRC. Where inputs exceed outputs, a repayment will be made by HMRC. Payments can be made in a variety of specified ways..
If you’re a VAT-registered business you must report to HM Revenue and Customs (HMRC) the amount of VAT you’ve charged and the amount of VAT you’ve paid. This is done through a VAT Return which is usually due every 3 months. You must submit a VAT Return even if you have no VAT to pay or reclaim. Surcharges will apply for late payments.
Be careful, HMRC record a ‘default’ if:
• they don’t receive your VAT return by the deadline
• full payment for the VAT due on your return hasn’t reached their account by the deadline
You may enter a 12-month ‘surcharge period’ if you default which is a percentage of the VAT outstanding on the due date for the accounting period that is in default.
HMRC can charge you a penalty of up to 100% of any tax under-stated or over-claimed.
You must account for VAT on the full value of what you sell, even if you:
• receive goods or services instead of money (eg if you take something in part-exchange)
• haven’t charged any VAT to the customer – whatever price you charge is treated as including VAT
There are various goods and services that are outside the VAT tax system so you can’t charge or reclaim the VAT on them. As a VAT-registered business, you can sell certain goods and services to charities at the zero or reduced rate of VAT.
“VAT is complex and can be confusing but if presented in a simple way, it does not need to be. This is why we have teamed up with ICAEW to provide you with the need to know information ensuring that you are able to make a well informed decision from the outset.”
Vin Murria, Director
Various other schemes
Cash Accounting (or Receipts and Payments system) if business VAT taxable sales less than £1.6 million:
• Use receipts from customers and payments to suppliers rather than invoices;
• Helpful if cash-flow is a problem and bad debts an issue;
Annual Accounting Scheme
• You make nine monthly or three quarterly instalments based on an estimate of VAT paid in previous year or estimated liability;
• You must complete one VAT return every year;
• You must still keep the required records in case of VAT inspection;
• Not suitable for businesses that regularly reclaim VAT, as you only get one repayment a year.
Flat Rate Scheme
• Do not have to record and calculate VAT on each transaction;
• Pay as a flat rate percentage of turnover as VAT is based on sector figures;
• Percentage is less than standard VAT rate because it is net of Input Tax.
VAT schemes for retailers
• If you sell to the general public, there are several other schemes you might use.
Accountancy help for businesses can be obtained from ICAEW’s Business Advice Service. This is a free straightforward discussion with an ICAEW Chartered Accountant. Further information about the service can be found at www.businessadviceservice.com
To register for X-Forces’ start-up and business planning support today through our website, www.x-forces.com/contact-us/ or by telephone.
Article by Clive Lewis, ICAEW in conjunction with X-Forces Director, Vin.