VAT – An Overview
What is VAT?
VAT is an amount charged on most goods and services that are purchased in the UK and equivalent in Europe. A business registered for VAT will charge it on to other business and consumers in the UK. The good thing is that VAT registered business are able to recharge the amount of VAT that has been charged to them. The bad thing is that non-vat registered business and consumers are not able to claim back the VAT. Effectively it is a sale of good tax to consumers.
- Currently in the UK, there are three rates of VAT and an exemption rate:
- Standard rate VAT – is the one we know – at 20%
- Reduced rate VAT – mainly utilities – at 5%
- Zero rate VAT – being 0%
Exempt VAT – has no rate and does not carry any VAT charge and those that are outside the UK VAT system altogether.
This brief guide takes you through standard VAT. A further guide is available to look at some of the areas in detail, but still hopefully in a simplistic easy to understand way.
VAT is not just for companies but it applies to anyone in business whether they are a sole trader, partnership charity or company. The list of “legal entities” that have to be VAT registered if they are in business, are:
- an individual
- a partnership
- a company
- a club
- an association
- a charity
- any other organisation or group of people acting together under a particular name, such as an educational or health institution, exhibition, conference, etc
- a trust
- a Local Authority
VAT is reported (and paid for) on a quarterly basis. The months go:
- Jan/Feb/Mar, Apr/May/Jun, Jul/Aug/Sept, Oct/Nov/Dec
- Feb/Mar/April, May/June/July, Aug/Sept/Oct, Nov/Dec/Jan
- Mar/Apr/May, Jun/July/Aug, Sept/Oct/Nov, Dec/Jan/Feb
It is possible to ask HMRC for a change in the periods and the most common reason is to align with the business year end.
When must I register for VAT?
The UK threshold is set at £83,000 for 2016/17 (£82,000 for 2015/2016). However, it is based on a 12 month rolling period so not just for the fiscal year 6th April 2016 to 5th April 2017. If it is likely that your sales of goods/services that would be applicable to UK VAT exceed £83,000 in a twelve month period looking back and forward, then you must register for UK VAT.
A business can register voluntarily for VAT which may give rise to a cash flow benefit, as well as giving perceived comfort to your customers. From a marketing perspective, but not being vat registered it may give the impression to prospective clients that you are a small business and this may put them off from using your services as they may feel that you are inexperienced and not able to fulfill their order due to lack of resources.
Of course, there are disadvantages of being VAT registered in that you have to prepare VAT returns on a quarterly basis, or employ a bookkeeper or accountant to do it for you. This adds to the cost of doing business. Being VAT registered may make you more expensive to your non-VAT registered customers and not as competitive. It would be a case of looking at where most of your income came from and then assess if you want to register voluntarily. Of course, if you are over the threshold, you have to legally register.
The table below shows a business starting up in January 2015, keeping an eye on its turnover and then seeing that it needed to have been registered for UK VAT in March 2016. This could be based on a sales forecast and if it’s proved to be fairly accurate, you would know that the business should start to apply earlier to be ready to charge VAT
NB – Remember that your VAT taxable turnover includes only the goods and services you sell that you have to charge VAT on, even those that are zero-rated. It doesn’t include sales that are exempt or outside the scope of VAT
What about pre-registration costs?
This is interesting. You can claim back VAT on any items of equipment or stock that was purchased for the business up to four years prior to the registration, provided that the items are still in existence and part of the balance sheet. For services, you can go back 6 months.
How do I report?
There is a paper copy that can be sent to you by HMRC every quarter and this has to be back at HMRC but the 30th / 31st of the month following the end of the quarter. There is an option to do the filing on line which is how most businesses are doing their VAT filing now. This gives you another 7 days. Payment needs to be made at the same time that the return if filed. However, if you file online, HMRC will take the payment several days after the 7th of the month. If a repayment is due, a paper return normally means that the money will be refunded after the 7th of the month. Should you file online and file early which shows a refund, you don’t have to wait until a few days after the 7th of the money to get the refund.
It is a fairly simple thing to deregister for VAT if your turnover has reduced to less than £81,000 (yes it is a different threshold). If it is going to waiver around the threshold, then it is best to stay registered, but if it has reduced significantly, then write to HMRC asking for de-registration. You will need to explain why turnover has dropped so much for example lost contracts, working hours changed etc., and a twelve month turnover forecast will need to be given.
How can Performance Accountancy help?
The first step is to establish if you need to be VAT registered and if it’s agreed you do, we can work with you to complete the VAT registration form and then the application for flat rate vat is that is appropriate for your business.
Once the registration has come through, we can help set up processes to collect details relevant for the VAT return in your accounting procedures. Part of this is dependant on whether the standard scheme, flat rate or cash basis scheme is used.
We can also set you up on line in order to do online reporting of your VAT return which gives you a bit more control over the reporting and payments going out, and also make sure the direct debit is set up on the system to allow HMRC to take the required payment. Money needs to be in the nominated bank for this to happen in order to stop rejections from the bank. As usual, late payments of VAT can produce interest & penalties. This is known as a default surcharge which is a percentage of the unpaid VAT. If your turnover is less than £150,000, the first time it is missed, you just get a warning letter, but best not get into that situation in the first place. There is no surcharge to pay if a nil return is sent back late, or you are due a repayment.
At the end of each quarter, we will call you and nag you for your information which we will need after the first few days of the month. The documentation can be posted to us using the prepaid envelopes, dropped into the office, or scanned to the dropbox in order for us to print and use. The information we will need are:
- Copies of invoices sent to customers in the last three months;
- Business bank statements
- Business credit card bills
- Invoices and receipts received from suppliers
- List of cheques written and who to
- Bank paying in book if money paid in that needs to be matched to invoices.
We will then create and Excel file which will show the inputs & outputs needed for the return, and which figure needs to go into which box.
Should you wish, we can act as your VAT agent. If that is the case, we will get you to approve & sign the draft VAT return, file it online and let you know how much you need to pay – although you will know that from the draft.
Performance Accountancy are happy to meet with people for a no-obligation discussion on what we can offer you & your business, and what you would require from us. Price alone is never the determining factor. Call us on 01344 669084 or email on [email protected]