VAT registration can be mandatory or voluntary and it affects not just Limited Companies but Sole Traders and Partnerships as well.
You must register for VAT within 30 days if:
- your VAT taxable turnover is more than £85,000 in a 12 month period
- you receive goods in the UK from the EU worth more than £85,000
- for distance selling (only goods not services) into the UK worth more than £70,000
- for completing simplified EC Sales List £106,500 or less and supplies to EU countries of £11,000 or less
- you expect to go over the threshold in a single 30 day period
From the date HMRC appoints as Effective date of registration you must:
- charge the right amount of VAT
- pay any VAT due to HMRC
- submit VAT Returns
- keep VAT records for 6 years and a VAT account
One of the most important task is that you always have to handle carefully invoices issued and received. You cannot reclaim VAT using invalid invoices and for that matter pro-forma invoices. Statements or delivery notes. Besides full VAT invoice you might be able to use modified or simplified invoices as well.
IMPORTANT! There are significant changes in the way you calculate and report VAT on prompt payment discount VAT invoices!
You can only issue a VAT invoice if you are VAT registered!
|Rate||% of VAT||What the rate applies to|
|Standard||20%||Most goods and services|
|Reduced rate||5%||Some goods and services, eg children’s car seats and home energy|
|Zero rate||0%||Zero-rated goods and services, eg most food and children’s clothes|
Make sure you aware of the differences between Zero rate, Exempt and Out of scope and consequences of using them.
Besides keeping your records physically and/or in a software you have to keep a separate account which is the VAT account. This account is the base for your VAT Returns.
It must show:
- your total VAT sales
- your total VAT purchases
- the VAT you owe HMRC
- the VAT you can reclaim from HMRC
- if your business uses the VAT Flat Rate Scheme – the flat rate percentage and turnover it applies to
- the VAT on any EU acquisitions (purchases) or dispatches (sales)
If your business have written down a VAT invoice as bad debt you also have to keep a separate VAT bad debt account.
Businesses usually submit a VAT Return to HMRC every 3 months based on their VAT Account online. The deadline for submitting the return online and paying HMRC are usually the same, 1 month and 7 days after the end of an accounting period. Failing to comply with the submitting requirements can result a penalty, this includes understatements, errors discovered and not reported or filing paper form when you are not exempt from submitting online.
Always calculate with time when you paying your tax bills.
VAT Schemes aim to simplify your VAT accounting, improve your cashflow and in the process you might save some tax for yourself. They target specific trade sectors or general business issues (eg quantity of transactions). If you not sure how you join or leave the schemes and which one can be combined with others please ask for help as mistakes can result in a much higher VAT bill than you would have expected.
|VAT accounting scheme||Threshold to join scheme||Threshold to leave scheme|
|Flat Rate Scheme||£150,000 or less||More than £230,000|
|Cash Accounting Scheme||£1.35 million or less||More than £1.6 million|
|Annual Accounting Scheme||£1.35 million or less||More than £1.6 million|
Flat Rate Scheme
This scheme is designed to help small businesses to reduce the amount of time they spend on accounting for VAT. At first glance it is very attractive but the devil lurks in the details.
- Instead of the official VAT rate you calculate a lower, fixed rate set for your business type.
- You can keep the difference between what you charge your customers and pay over to HMRC
- You can get a first year discount of 1% off of your rate (special rules how to apply)
- It can be combined with Annual Accounting
BUT in exchange
- You cannot reclaim VAT on your purchases except for certain assets
- You apply the rate on all your gross selling including zero rate, exempt and sales to other EU member States and even sales of second-hand goods!
Cash Accounting Scheme
Mainly for cash-flow reasons it sounds good to pay the VAT bill only if you have been paid by your customer, but choosing this scheme has some common pitfalls to it.
- Your cashflow could improve especially if you have slow paying customers or bad debts
- It can be combined with Annual Accounting to simplify matters further.
- You cannot claim VAT on purchases until you have paid your suppliers
- You lose control over your VAT calculation as you cannot control when you are being paid.
- It is not beneficial if you are in a claiming position most of the time towards HMRC.
Annual Accounting Scheme
This scheme aims at simplifying your VAT matters by allowing you to submit only 1 return per year and paying set instalments of VAT on account quarterly (25%) or monthly (10%) with a balancing payment at the end of the year. You can combine the Annual Accounting Scheme with Flat Rate Scheme (joint application), Cash Accounting, Retail Schemes, Margin Schemes, Capital Goods Scheme and the Tour Operators margin scheme.
On the other hand
- if you are usually in a claiming position towards HMRC you will have only one repayment at the end of the year
- your set interim payments can be higher or much lower than you would have if you would account for VAT in a standard way resulting still a big sum at the end of the year or by overpaying and compromising your cashflow you will get your money back too late.
- You still have to keep on top of your records to avoid surprises and to be able to respond to compliance checks.
A margin scheme is an optional method of accounting which allows you to calculate VAT on the value you add to the goods you sell, rather than on the full selling price. The Margin Schemes are optional, can be used at any time and you do not have to register for it and you can still use standard VAT Accounting for other sales and purchases such as overheads.
There are three margin schemes for goods:
- The Margin Scheme for second-hand goods, works of art, antiques and collectors’ items
- Global Accounting (instead of calculating the margin on each individual eligible items, you calculate on the total eligible sales and purchases instead.
- The VAT Auctioneers’ Scheme
This scheme can be only used for retail sales only and designed to help businesses to record their sales who cannot reasonably be expected to account for VAT in a normal way. These businesses usually deal with a large number of non VAT registered customers with low value purchases and only be required to produce periodic totals of tax exclusive values and VAT. The retailer still produces normal VAT invoice to any VAT registered businesses and these latter invoices are not included in the scheme. It can be used with Annual Accounting Scheme and Cash Accounting Scheme
There are 3 standard VAT retail schemes:
- Point of Sale Scheme – you identify and record the VAT at the time of sale
- Apportionment Scheme – you buy goods for resale
- Direct Calculation Scheme – you make a small proportion of sales at one VAT rate and the majority at another rate
There are special arrangements for:
If you think you need help your VAT matters please don’t hesitate contacting OptiAccounts >>HERE<<