When should you register for VAT?
It’s compulsory to register for VAT once your earnings pass a threshold amount of £85,000. That threshold can change from year to year. Once you pass the threshold, you have 30 days to register. If your business earns less than the threshold amount, registering for VAT is optional, but there are some good reasons for doing so.
Advantages of registering for VAT:
- You can reclaim VAT paid for business purposes
Business supplies such as computers, desks, chairs and utilities have VAT applied to them. You’ll need to pay VAT on those business supplies at time of purchase, but you can reclaim it from the government when filing taxes.
- It looks professional
Being VAT registered makes you look more professional to other businesses. It can also hide the fact that your turnover may be lower than the compulsory VAT threshold.
Disadvantages of registering for VAT:
- You’ll have to charge more
You’ll need to add VAT to your prices. It shouldn’t make you more expensive than your competitors, though, as most of them will have to do the same. And if you sell to VAT-registered businesses, they’ll be able to claim the VAT back.
- You’ll have to do more accounting
You’ll need to pass on the VAT you’ve charged to the government and submit quarterly VAT returns. From 1 April 2019 VAT-registered businesses with a taxable turnover above the VAT threshold are required to use the Making Tax Digital service to keep records digitally and use software to submit their VAT returns.
HMRC can charge significant fines to businesses that fail to accurately account for VAT. Late filing, late payment and incorrect information can also be heavily penalised. You need to maintain a system in reporting VAT to make sure your returns are accurate and on time. There are several VAT schemes available to small businesses.
Standard VAT Scheme
This is the default scheme you’re assigned to unless you state otherwise. On this scheme, you reclaim VAT at the point you receive an invoice from your supplier and pay it when you invoice your customers.
Flat Rate Scheme
Designed to encourage small businesses to register for VAT, with this scheme, you charge VAT at the appropriate rate but pay VAT to HMRC at a lower rate. Your business’s turnover must be less than £150,000 to qualify for the flat rate VAT scheme.
The big advantage of this scheme is that you don’t have to keep a record of the VAT you charge on every sale or pay VAT on every purchase. Instead you can calculate your VAT payments as a percentage of your total VAT-inclusive turnover, which makes it easier and quicker to do your VAT return.
You don’t have to work out how much VAT you spend either. Instead the percentage rate you apply – typically between 9% and 14% depending on industry sector – is designed to take account of the VAT you have spent.
From 1 April 2017, a new flat rate percentage of 16.5% was introduced for limited cost businesses. These are businesses whose expenditure on goods is less than either:
- 2% of their turnover
- £1,000 a year (if costs are more than 2%)
For some businesses it may be unclear if they are a limited cost business, especially if goods are close to the 2% threshold. It is likely to affect you if your main costs are services, vehicle or fuels costs, or if you do not purchase many goods.
To make this simpler HMRC has developed an online calculator to help businesses work out if they are eligible to pay the higher rate. The calculator can be used each time a VAT return is completed to clarify any uncertainty.
Normally on this scheme, you don’t reclaim any of the VAT you pay on purchases. However, if you purchase a capital asset worth £2,000 or more including VAT, you may be able to reclaim the VAT element at the standard rate, rather than your flat rate percentage. If you later sell this asset, you then need to ensure the VAT on the sale appears on your VAT Return at the standard rate.
The flat rate scheme can be used with the annual accounting scheme. As it contains its own cash-based method of accounting, it cannot be used with the cash accounting scheme.
Cash Accounting Scheme
Using the Cash Accounting Scheme, you pay VAT when your customer pays you, but you also need to consider that you can’t reclaim VAT on your purchases until you have paid for them. You are only eligible for the VAT cash accounting scheme if your estimated taxable turnover is no more than £1.35m and can then stay in the scheme as long as it remains below £1.6m.
The advantages of this scheme are:
- It’s good for cash flow, especially if your customers are slow to pay.
- It’s even more useful if you have bad debts.
- You don’t pay the VATif your customer never pays you.
Annual Accounting Scheme
The annual accounting scheme allows you to pay VAT on account, in either nine monthly or three quarterly payments. You then complete a single, annual VAT return which is used to work out any balance owed by you or due from HMRC. This method allows you to budget more carefully and because payments are spread throughout the year, it’s often better for cash flow. However, you may end up over-paying or under-paying HMRC at times, so you may be required to make a final balance payment or apply for a refund.
Again, this simplifies your VAT paperwork. You are only eligible for the scheme if your estimated taxable turnover is no more than £1.35m and can then stay in the scheme as long as it remains below £1.6m.
If eligible, you may be able to combine the annual accounting scheme with the flat rate VAT and VAT cash accounting schemes.
Capital Goods Scheme
The Capital Goods Scheme is used by businesses to claim VAT exemption or rebates on assets such as land, property or equipment, which have been purchased with the intention of resale, but have been used by their owner for other purposes. This could be intentional, or due to a genuine change in circumstances.
Effectively, the scheme allows companies to spread the initial VAT claimed on assets over a number of years. If the asset is used solely for business use, you can reclaim all of the VAT. If it’s used for a combination of business and personal use, you can claim back a percentage of the VAT – this is known as a ‘partial exemption’.
VAT Margin Scheme
Normally you charge VAT on your sales and reclaim VAT on your purchases. However, if you sell second-hand goods, works of art, antiques or collectibles, there may have been no VAT for you to reclaim when you bought them. You may be able to use a VAT margin scheme. This enables you to account for VAT only on the difference between the price you paid for an item and the price at which you sell it – your margin. You won’t pay any VAT if you don’t make a profit on a deal. You can still use standard VAT accounting for other sales and purchases such as overheads. Using standard VAT accounting, you charge VAT on your selling price and reclaim VAT on the price of your purchases. This means that you only pay VAT on the value you added to the item you sold, that is, the difference between how much you paid for the item and how much you sold it for. There are specific rules for defining what the margin is, and there are limits on the types of goods which are eligible for the scheme.
VAT Retail Scheme
If you sell to the public, especially high quantities of relatively inexpensive items, it can be difficult, time-consuming and costly to record the VAT on every individual sale in your accounts. There are several VAT accounting schemes that retailers can use instead of accounting for VAT in the standard way. These can help simplify your retail VAT accounting. There are several different standard retail schemes, or, depending on your business, you may be able to agree a bespoke VAT retail scheme with HM Revenue & Customs. If your turnover is over 130m, you can only use a bespoke scheme.
With the VAT retail schemes, you:
- Work out the value of your total VAT taxable sales for a period – for example, a day
- Work out the proportions of that total that are taxable at different rates of VAT (standard, reduced and zero) – these will vary according to the scheme you are using
- Apply the appropriate VAT fraction to that sales figure to calculate your VAT due
You can only use the retail scheme for supplies that you make by way of retail, and you must still issue a VAT invoice to any VAT-registered customer who requests one.
VAT accounting schemes can make your life easier, simplifying your VAT accounting and in some cases improve your cash flow. Different accounting schemes suit certain types of businesses. However, any scheme you choose must, in the opinion of HM Revenue & Customs, give a fair and reasonable result in the amount of VAT paid. Consider looking for an accountant with other clients in your industry as they’ll know the pros and cons. And be aware that the size of your business can also affect your choice.
Do you still have questions?
In Outsourced ACC we have a wide range of experience for over 20 years. Get in touch with our team on 0208 249 6007 to find out more about how they can help you.