VAT Returns for
Limited Companies or Sole Traders
VAT returns, for both limited companies and sole traders, are included in our monthly subscription service on our Unlimited Package. If you have VAT returns that are outstanding when you join More Than Accountants, we will complete these returns and bring you up to date for a discounted fee of 50%.
What's the process for completing your VAT Returns?
VAT Return Production
Although VAT may require more paperwork, it can also lower your costs by permitting you to reclaim the VAT that you have paid for your business purchases. Most businesses have no other option but to register for VAT once they obtain sales of £85,000 a year.
It is important to know whether you are required to register for VAT. Furthermore, what are the things that you need to do if your business has been registered for VAT, especially if you qualify for the HMRC “Making Tax Digital” program? You could easily comply with your VAT requirements by utilizing the proper VAT accounting scheme.
You need to understand that VAT is the tax imposed on business transactions and has a great impact on all sales and purchases. Remember that this is not a tax on your revenue or profits. Presently, most supplies have a VAT of 20%, although some products are either taxed at 0%, 5%, or exempt.
- Any business that has VATable purchases should pay VAT.
- The VAT you pay is also known as “input VAT”.
- VAT-registered companies are allowed to reclaim their input VAT from HMRC.
- VAT-registered companies must add VAT to their VATable sales.
- Those companies that are making significant VATable sales must register for VAT.
- The VAT you add is also referred to as “output VAT”.
- The VAT being collected by VAT-registered companies is meant for HMRC.
- The difference between the input VAT that your business can reclaim and the output VAT that you have added will be surrendered to HMRC, most often, quarterly.
- For instance, a VAT-registered retail store that is selling a vase for £30 must add 20% VAT, or £6, to its price, making it £36. The vase was bought by the retail store for £12, which is £10 plus 20% VAT, or £2, from a VAT-registered supplier. Therefore, the retail store owes £4 to HMRC, which is the difference between the output VAT of £6 and the input VAT of £2.
For VAT purposes, goods and services are categorised into four groups.
- These cover prescription drugs, books, children’s clothing, food, the construction of new houses, and printed matter.
- The rate of VAT is 0%.
- Typically, exports are zero-rated; however, special rules and guidelines may apply.
- Although there is no VAT added on zero-rated supplies, all companies can still opt to register for VAT so they can reclaim the input VAT that they have paid for their related purchases.
- The rate of VAT is 20%.
- Most goods and services out there are standard-rated.
- The rate of VAT is 5%.
- These cover children’s car seats, residential conversions and a few renovations, domestic fuel, and the installation of energy-saving materials in residences.
- Although the VAT rate is 5%, any related purchases that include VAT can be reclaimed no matter what the rate of VAT is being used.
- For exempt supplies, no VAT will be added since they are not VATable.
- Consequently, businesses will not be able to reclaim VAT on all related purchases.
- Compared to reduced-rated, standard-rated, and zero-rated supplies, VAT is not applicable to exempt supplies. If your company only sells exempt supplies, then there is no need for you to register for VAT.
- This category covers insurance, finance, and a lot of property transactions.
One of the greatest benefits of registering your business is that you will have a chance to reclaim the VAT that you pay on related purchases. However, if your business primarily deals with the public and you start charging 20% VAT on your prices, then you might lose your customers.
- A business is required to register if it has reached the registration threshold of VATable sales.
- If your VATable sales have exceeded £85,000 during the last 12 months, you must let HMRC know within 30 days, starting at the end of the month.
- On the other hand, if you anticipate that your sales will fall below the threshold, then you can ask HMRC to let you remain unregistered.
- Furthermore, you must register your business if you anticipate your sales will exceed £85,000 during the next 30 days. For instance, if your new company has already booked orders for a total of £85,000.
- For late notification, you will be charged a penalty of around 15% of the VAT which will be paid on your first return. Furthermore, you are also required to pay HMRC the amount of VAT that you should have charged to your customers.
- Even if your sales are less than the registration threshold, you can still choose to register for VAT.
If you do this, then you will have the chance to claim the VAT that you have paid for your business purchases. Registering might be a good option if:
- Your clients are VAT-registered.
- You have zero-rated sales.
- You are planning to set up a business producing VATable supplies. If you register, then you will have a chance to reclaim VAT on your pre-trading purchases.
- However, it is important that you present some proof of your intention to produce VATABLE supplies.
- Businesses that have registered can deregister.
- A final VAT return must be completed for deregistration. In the event that the VAT due on stock and assets exceeds £1,000, then output VAT should be accounted for.
- If you would like to deregister from VAT because you are liquidating or selling your business, then you should contact HMRC.
- You are allowed to deregister if you anticipate that your VATable sales will be less than £83,000 in the succeeding 12 months.
The output VAT that you will pay to HMRC must start on the date that you are required to register, instead of the date when your registration was completed.
- Make some adjustments to your pricing.
- Even if they are still processing your application, your pricing should already reflect the VAT due minus the input tax that you will have to reclaim.
- If you decide not to change your prices to prevent losing your customers, you are still required to pay VAT to HMRC, which is computed by considering that VAT is included in the sales value. The output VAT for standard-rated supplies will be computed as one sixth of the total amount charged.
- On your invoices, you should only indicate the gross amount. A VATnumber should not be indicated separately until a VAT number is assigned. Inform your customers that appropriate VAT invoices will be released to them after you are registered.
After you have registered for VAT, it is a must that your business issues VAT invoices.
This must be done for all the sales you acquire from VAT-registered customers.
However, this is not applicable to sales of zero-rated or exempt products except if they are included in sales of other VATable products. If this happens, it is important that the invoice has separate totals.
Be sure to retain a copy of the VAT invoice for your file.
- Specific details should be included in the invoice such as:an invoice number.
- Your VAT registration number, name, and address,
- The tax point and, if not similar to the tax point, the issuance date,
- the name and address of the customer.
- description of the products or services,
- type of supply such as lease, sale, or rent,
- unit cost and the rate of VAT,
- discounts, if any,
- The total amount without VAT,
- total VAT,
- Total amount payable, VAT included.
- A VAT invoice is not required for sales to the public except if it is requested.
You could issue a less complicated invoice for retail sales that is worth less than £250, which shows:
- the invoice date.
- VAT number, name, and address of the supplier,
- From the description of the supplies,
- rate of VAT,
- total VAT inclusive cost.
Claiming back input VAT requires a VAT invoice.
For the fuel of cars, special rules must be applied.
In the event that the car is solely used for business purposes, the process of reclaiming input VAT on fuel is just the normal way.
On the other hand, you can choose to either claim back VAT solely for the fuel utilized for business purposes, or you could claim back all the VAT and be liable to pay for a “fuel scale charge”.
Input VAT on non-business purchases cannot be reclaimed.
Generally, you are not allowed to claim VAT when you are purchasing a company car and are 50% disallowed on car leasing costs, except when the car is solely used for business.
Special rules will be used if the business is producing exempt supplies.
If the business is solely producing exempt supplies, then it is not permitted to register for VAT and will not be able to claim back input VAT.
Otherwise, if the business is making both VATable and exempt supplies, it is considered “partially exempt”. However, the business could register for VAT and claim back a portion of the input tax incurred.
If you are running your business at home, then you could reclaim a portion of VAT on some of your costs.
For instance, you could reclaim VAT on phone calls that are business-related.
The way VAT on imports is treated will depend on the supplier’s country.
Generally, an import VAT will be charged on products purchased from suppliers outside the EU, but the rate will be the same as if they were purchased in the UK. You could reclaim this as input VAT if you have proper documentation for this. However, you cannot claim back the import duty that you have paid.
Furthermore, you can purchase items from suppliers located in other EU countries, and you don’t have to pay VAT once the goods arrive in the UK. Rather, the VAT dues will be considered as “acquisition tax” when you file a VAT return. However, it can also be claimed back as input tax on this return.
Your business will pay VAT to HMRC in every quarterly VAT period.
- To easily manage your VAT, you must ask HMRC for VAT periods that are suitable with your accounting year.
- If the turnover of your business is more than £85,000, which is the VAT registration limit, then “Making Tax Digital”, the HMRC initiative has applied starting on April 1, 2019. All VAT returns should be submitted through HMRC compatible software.
- Businesses must file their VAT returns online and payment for VAT should be done electronically.
- The deadline for filing and paying online VAT returns will be one month and seven days right after your VAT period ends.
Figures shown on VAT returns must come from your accounting records only.
- Your accounting records must indicate output VAT, input VAT, and payments made to or from HMRC. Zero-rated, exempt, reduced-rated, and standard-rated supplies must be separated. Exports or imports must be detailed.
- If your business turnover is more than £85,000, then it only means that you are qualified for “Making Tax Digital” and you should use the digital format for your records. Consequently, this is incorporated with HMRC approved software for filing returns.
- By using a simple bookkeeping system in controlling your business, there is less work needed for completing VAT returns. If a business is generating both VATable and exempt supplies, then most likely a more complicated accounting is required.
Every purchase or sale includes a tax point, which is the date utilized for VAT accounting.
- The date of supply will be considered as the basic tax point.
- If you receive an advance payment or a VAT invoice is issued, then whichever is earlier will be the tax point.
- In case a VAT invoice is released within 14 days starting from the date of supply, then the tax point is later than the invoice date.
HMRC will come and visit your business to check your records.
- If HMRC discovers that there are mistakes in your VAT returns, then you might be charged with interest and penalties.
- If they discovered a miscalculation of more than £10,000 after sending the VAT return, then VAT 652 or a voluntary disclosure letter must be sent to HMRC. This letter will contain an explanation of the mistake and a payment for the VAT due will be enclosed or in case of overdeclared VAT, a repayment will be asked.
- If the miscalculation is only less than £10,000, then you can make some adjustments on your succeeding VAT return, however, appropriate records must be kept justifying the entry.
Businesses should be aware that there are a lot of accounting schemes that can be used that can help small businesses reduce the amount of administration. Regardless of what scheme you choose, the net amount of VAT required remains the same.
Aside from retailers, a lot of small businesses are also using the cash accounting system.
The basis on your account for VAT will be the date when cash is paid out, in the case of purchases, or when cash is received, in the case of sales, instead of the tax point.
This can prevent any problem that may occur with bad debts or late payment of credit sales.
Any business is allowed to use cash accounting if the approximated VATable turnover for the succeeding tax year does not exceed £1.35 million. When a business uses cash accounting, it can keep using the scheme until the VATable turnover has gone up to £1.6 million.
If your business is using the scheme from the outset, then you must claim back VAT for your pre-registration purchases during your first VAT return or your claims might be blocked.
When the annual accounting scheme is used, only one VAT return is required every year.
Vat payments will be made every three quarters, or every nine months. The basis for this will be an estimate of the overall annual VAT bill. Once the annual confirmation is sent, you must pay the balancing payment.
If the approximated VATable turnover of a business reaches £1.35 million, then you are allowed to use this scheme. In fact, you can stay in this system until such time as your turnover has reached £1.6 million.
Starting from the date you registered for VAT, all businesses that fall under the threshold can utilize the scheme.
Small businesses can make use of the flat rate scheme.
Individual purchase transactions will be neglected, and you cannot reclaim input VAT except if it is a single capital item that costs over £2,000.
Rather, the VAT you pay to HMRC is a permanent percentage of your VAT-inclusive turnover based on the category of your business. It can range from 4% to 14.5%. During the first year of VAT registration, this will be reduced to 1%.
except if the amount of direct goods is less than £1,000 pa or 2% of VAT inclusive turnover. The business will then be classified as a “limited cost trader” and a 16.5% flat rate will be assigned. For those that belong in this category, the VAT due will be added to the amount due. Hence, it is essential that you only incorporate “relevant goods” when it comes to eligibility so you can remain at a lower rate.
Normal VAT invoices that show normal VAT rates will still be issued.
The system can still be applicable in the event that the estimated VATable turnover reaches £150,000 during the succeeding 12 months. Once you are already on the scheme, you can choose to remain there until such time that the overall income of your business is more than £230,000.
Reverse charge VAT scheme
Starting March 1, 2021, a recent reverse charge VAT scheme was introduced to the construction industry.
This is used for handling the well-known “Missing Trader” fraud. In this scheme, rather than having the supplier liable for accounting for VAT on labor, it will be the customer.
The system is not applicable to domestic customers or to the final business, but rather to sub-contractors who are supplying workers to a main contractor.