All Things VAT
February’s “Topic of the Month” is all things VAT – we hope you find this useful.
What is VAT?
VAT stands for “Value Added Tax” and is added to goods and services by VAT registered businesses. There are 3 main rates of VAT:
Standard rate – 20% - this is on most goods and services
Reduced rate – 5% - some goods and services ie home energy and children’s car seats
Zero rate – 0% - some goods and services ie most food and children’s clothes
And there are some things that are exempt from VAT such as stamps, healthcare and medical treatment, insurance etc (a full list can be found here if you need some dull reading).
And then there are items that fall outside of the scope of VAT for example goods or services that you buy and use from outside of the UK, donations to charities, goods you sell as part of a hobby etc.
The difference between zero rated and exempt or outside the scope of VAT is that the 3 main rates of VAT can be changed .. so at some point in the future, the Government may decide that zero rated items should be charged 2.5% (for example). It is rare, but items can be moved from one tax rate to another ie period products. If a business is not registered for VAT then it cannot add VAT to its goods and services.
When to register for VAT
A business must register for VAT if:
Its total VAT taxable turnover for the last 12 months was over £85,000 (the VAT threshold)
It expects it’s turnover to go over £85,000 in the next 30 days.
Business that are based outside of the UK and supply foods and services into the UK then they also need to register and we recommend that they seek advice in the country that they are in.
Some businesses may voluntarily chose to register for VAT. This may be because:
They expect to grow rapidly and would prefer to be registered for VAT from the start so that they don’t have to amend their pricing
All their customers are VAT registered businesses so registering enables them to reclaim the VAT from on their purchases
To give the impression of a business that is larger than it is. Generally, businesses can register for VAT online via this link.
Update - The budget in March 2024 increase the VAT registration threshold to £90,000.
What happens when you register for VAT?
Whilst you wait for you VAT number to be issued, you cannot include VAT on your invoices but you can increase your prices so as to cover off the VAT that will be due to HMRC – you will then need to reissue invoices with the correct breakdown on the invoice so that customers can reclaim their VAT.
Once you are registered and have your 9 digit VAT number, you must include this on your invoices and will need to submit a quarterly VAT return to HMRC using appropriate software. You have one month and a week to submit and pay your VAT each quarter (unless you set up a DD with HMRC and then they take this payment about 1 month and 10 days after the quarter end).
The VAT payable to HMRC is the VAT on the invoices you have raised / sales you have made less the VAT that you can reclaim on your purchases in that period.
Submitting and paying your VAT on time is really important as there are penalties for late submission and late payment. These are now points based and points accumulate and also clear off after a certain period of time. If you want to know more about the penalty regime then you can read about it here https://www.gov.uk/government/collections/vat-penalties-and-interest
If you think you will struggle to pay your VAT bill on time then it is best to speak to HMRC and request a “time to pay arrangement”, you will still pay interest etc on the late payment but being upfront with HMRC and agreeing when payments will be made is always the best plan.
VAT Schemes
There are a few VAT schemes in place that can help simplify how businesses calculate and pay their VAT – they do not alter how you charge VAT to your customers, these are still at the rates detailed above.
Flat Rate Scheme
Under this scheme you pay a set percentage of gross turnover (so VAT inclusive turnover) to HMRC each return rather than VAT on sales less VAT on purchases. You can only use this scheme if you are a small business with annual taxable turnover of £150k or less (excluding VAT). The percentage is set depending on your industry and type of business.
Annual Accounting scheme
If your VAT taxable turnover is £1.35 million or less, you may be eligible for the annual accounting scheme – this is where you submit one VAT return each year instead of one each quarter but you still make advanced payments to HMRC of the VAT based on your last return or on estimates if you are new to VAT. Personally, I think paying based on what is actually due rather than estimates is going to be better for managing your business and there’s a real risk that business records aren’t kept up to date on a timely basis if you only submit one return a year.
Cash Accounting scheme
Again, VAT taxable turnover needs to be £1.35 million or less to be eligible for the cash accounting scheme. Under this scheme you pay the VAT to HMRC when you are paid by your customers rather than when you raise the invoice. If you have very long payment terms this might be of use, but for most businesses you should have been paid by the time the VAT is due to be paid: raise an invoice on the last day of the VAT quarter on 30 day terms and you would be paid at the end of the next month and the VAT would be payable to HMRC one month and a week after the quarter end.
It is always best to seek the advice of an accountant to see if any of theses scheme would be suitable for you.
Rachael