VAT Accountants Guide to VAT
What is VAT and How Does It Work?
VAT is a tough subject. Even the most seasoned contractors can be bewildered by the complexities and vocabulary used by some VAT accountants, so we set out to provide a jargon-free, back-to-basics reference on value-added tax.
To begin, what is VAT?
VAT (Value Added Tax) is a consumption tax that is levied on practically all products and services in the United Kingdom and the European Union. If your company is VAT registered, you must charge VAT on sales and can reclaim VAT on purchases made from other VAT-registered companies.
To make matters more confusing, some items are zero-rated, such as food, books, newspapers and magazines, and young children’s clothing and footwear, but I wouldn’t worry about these for the time being.
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What impact would VAT have on my business?
- It’s possible that you’ll have to include VAT in your costs.
- You’ll have to remit the extra cash to HMRC.
- You can get any VAT you paid on business supplies refunded.
When should I register for VAT and why should I do so?
When your company’s yearly revenue reaches a certain threshold – currently set at £85,000 – you must register for VAT. It’s critical to keep a close check on your turnover if you think it’s about to cross the threshold, because you’ll need to register as soon as it does. Waiting until the conclusion of a calendar quarter, or even worse, until your annual income tax return, is a common mistake.
If you expect your turnover to reach the criteria in the next 30 days – this period can begin at any time – you should also register. This rule may affect you if you are discussing a large deal with a customer and are required to register promptly so that the large contract in question is liable to VAT.
HMRC’s website has all of the necessary VAT registration paperwork, however keep in mind that the VAT threshold amount is subject to change, so double-check each year.
Even if your annual sales falls below the threshold, you can register for VAT on a voluntary basis at any time.
What happens if I don’t file a VAT return?
You may be subject to a penalty if you fail to register for VAT at the appropriate time. This is determined at 5%, 10%, or 15%, depending on the time between reaching the threshold and receiving registration notification from HMRC. A penalty of 5% is imposed for delays of up to 9 months, 10% for delays of up to 18 months, and 15% for delays of more than 18 months. You should preserve a copy of your registration notification because postal delays may affect the date on which HMRC gets it – and because a penalty can be reduced or completely waived if there were genuine reasons why you were unable to submit your application on time.
Is it possible to register for VAT even if my annual turnover is less than the threshold?
Yes, you can register for VAT at any time, and approximately 20% of all VAT-registered enterprises do so. Registering for VAT and obtaining a VAT number might help your business appear larger than it is, and some organisations require VAT registration from suppliers when pricing for work. Many small businesses do this in order to claim VAT back on things they purchase.
It’s worth noting, though, that having VAT registered may make you more expensive than your competitors who aren’t. For example, if you aren’t VAT registered and sell a product for £100, your buyers will only pay this amount. If you later register for VAT, you’ll either have to charge VAT on top or absorb the difference yourself, reducing your profit margin. It’s generally preferable to consult an accountant before registering for VAT in this circumstance.
You must satisfy HMRC that you are carrying on a business, or intending to carry on a business, and that you are making taxable supplies if you want to register for VAT despite not meeting the threshold. Satisfactory evidence will be required, and a covering note will be beneficial in avoiding any queries from HMRC. Last but not least, to register for VAT, you do not need to be a limited company.
When should I begin charging VAT?
You’ll begin charging on the day you apply for VAT, not the day you obtain your certificate, which could take up to 30 days.
You will need to raise your bills as a total figure, which includes the sale price and the VAT amount, while you wait for your VAT certificate. You can then add your VAT number to your invoices, separate the sale and VAT amounts, and re-issue to your clients, who will be able to reclaim the VAT you charged.
How to register for VAT?
Although you can register for VAT using a VAT1 form, the best approach is to do so online through HMRC’s portal.
You will be asked to create a VAT account when you register (sometimes known as a Government Gateway account). This will be required when submitting your VAT returns to HMRC. You can hire an accountant to do it for you, or you can do it yourself.
If you want to register for VAT on your own, you’ll need the following details:
- Your Social Security number
The certificate of incorporation for your business.
Details of all related business from the previous two years
Information about your business’s bank account
If you’ve purchased a business, keep track of the sales records.
After you’ve registered, you’ll get the following:
- Your VAT number?
- Your registration date
- When to submit your first VAT return
Within 30 days after registering, you will receive a certificate.
What are the advantages of registering for VAT?
Here are some of the advantages of having a VAT number:
- Being VAT registered allows you to recoup the input tax you paid while purchasing products for your business. There will be some purchases and expenses for which you will not be charged VAT.
- Insurance, finance, credit, education, training, and fundraising events are exempt from VAT; however, the bulk of other commodities will be subject to VAT. Being VAT registered gives your company more legitimacy, making it appear larger than it is and giving it a more professional image.
- Some businesses only do business with VAT-registered vendors, thus this will provide you more opportunity to work with a wider range of vendors.
- VAT-registered customers and clients can reclaim the VAT you charge them. It creates a more professional image, and the customer may be more eager to hire you again in the near future now that you are both VAT registered and they may be able to recoup some of their input tax.
What is the purpose of a VAT return?
If you are VAT registered, you must file a quarterly report with HMRC to show how much VAT you owe.
The return must include all of the total VAT your business has charged your consumers on things and services you’ve given (your output tax). It must also contain the VAT you seek to claim back on charges you made on purchases for your business, such as supplies, equipment, and stock. Input tax is the term for this.
The most important thing to remember is that the VAT return must contain all income invoices issued during the quarter, not income received – even if you do not get payment for 30 days or longer. HMRC will check the VAT form after it is submitted, and if your outputs exceed your inputs, you must pay the difference to the government. If your inputs exceed your outputs, however, your company is entitled to a reimbursement.
What is the Flat Rate VAT Scheme, and how does it work?
The Flat Rate VAT Scheme is a government incentive designed to make VAT simpler for small firms, particularly those that provide a service and hence do not have a lot of VAT to reclaim on company expenditures. As a result, it is the preferred scheme for most contractors and freelancers.
Accounting for VAT in a Standard Way
You can reclaim VAT on purchases for which you were charged VAT if you are registered under the basic plan. If you use the conventional accounting technique, you’ll have to fill out a regular VAT return form every quarter (online only).
This must include the following:
- All output tax – this is the VAT you charged to customers/clients on your invoices during the quarter. Whether or not you have been paid for the goods/services you provided, you must include this information on your VAT return form for that quarter.
- All input tax – this is the VAT that suppliers have charged you on items or expenses that your company has incurred throughout the quarter. You must include this on your VAT return form in that quarter, whether or not you have paid for the items or expenses.
The invoice must be included in the quarter in which it was raised, not the month in which payment was received.
- You do not have to register for VAT until you reach the £85,000 level during a rolling 12-month period after starting your firm; nevertheless, once you reach this amount, you must register for VAT.
- Some businesses voluntarily register for VAT for a variety of reasons, including the fact that some customers will only do business with VAT-registered businesses, or the fact that you may be wanting to buy a lot of goods that are VAT-chargeable and can be reclaimed.
- The standard VAT rate is presently 20%.
The Benefits of Standard VAT Accounting
Even if you haven’t paid for the products yet, you can still claim VAT from HMRC in your quarterly VAT return, which is beneficial to your cash flow.
Using Standard VAT Accounting Has Its Drawbacks
You must pay VAT to HMRC for services or items sold for which you have not yet received payment, which is inconvenient for cash flow, particularly for small enterprises.
Accounting for VAT on an annual basis
The Annual VAT Accounting Scheme is similar to the ordinary scheme except that instead of four quarterly VAT statements, contractors can submit one annual VAT statement. The contractor will pay in instalments and at the end of the year, a settlement figure will be paid. If a company’s annual turnover is less than £1.35 million, it is eligible to join.
The Benefits of Annual VAT Accounting
Annual VAT Accounting is convenient for certain limited company directors since it allows them to budget and spread payments out across the year.
Using Annual VAT Accounting Has Its Drawbacks
Because you can only claim VAT back once a year, it may not be profitable if you claim tax back on a frequent basis.
Because the VAT calculation is based on amounts paid in the previous financial year, there is a risk of incorrect payments.
What is the Cash Accounting Scheme, and how does it work?
The Cash Accounting Scheme is best for firms who don’t want to pay VAT until their customers or clients have paid for their goods or services, however it can’t be used if your annual turnover exceeds £1.35 million.
You’ll be requested to fill out a VAT return form for HMRC every quarter, indicating your output tax and input tax in a manner similar to a typical VAT return. VAT can’t be claimed or reclaimed on purchases or services that haven’t been paid for yet.
Even though the invoice was sent out in March and legally falls within the first-quarter deadline, the money was not received until June, therefore you won’t be able to claim VAT back until the second quarter. Before you can add this to your quarterly VAT form, you must first receive payment.
Benefits of Using a Cash Accounting System
The Cash Accounting Scheme helps your business’s cash flow because you’ll only have to pay HMRC VAT once you’ve received payment from your customers.
The Cash Accounting Scheme has a number of drawbacks.
You won’t be able to claim VAT back on any things you buy until you’ve paid for them. If you elect to quit the Cash Accounting Scheme, you must pay any unpaid VAT to HMRC before you leave.