VAT registered businesses act as unpaid tax collectors and are required to account both promptly and accurately for all the tax revenue collected by them. When setting up a new business, VAT accounting can be complicated. However, if you have the right processes in place things will run smoothly and efficiently.
To help we share some information and tips for managing your VAT returns:
Do you need to register?
You are required to register for VAT if the value of your taxable supplies exceeds a set annual figure (frozen at £85,000 from 1 April 2017).
If you are making taxable supplies below the limit you can apply for voluntary registration. This would allow you to reclaim input VAT, which could result in a repayment of VAT if your business was principally making zero rated supplies.
If you have not yet started to make taxable supplies but intend to do so, you can apply for registration. In this way input tax on start-up expenses can be recovered.
Choose the right VAT scheme
VAT schemes were created to make life easier when it comes to accounting and many businesses across the UK significantly reduce their admin requirements due to them. They are often of particular benefit to small businesses. Choosing the right scheme can help to benefit your business.
The cash accountancy scheme – this lets a business account for VAT only when you’ve been paid for invoices you have issued, providing obvious cash flow benefits.
The Flat Rate VAT scheme – this allows you to apply a flat percentage to your turnover to calculate how much VAT you need to repay to HMRC. Different businesses are allocated a different flat rate based on their business type.
Annual accounting scheme – this allows you to pay VAT on account, in either nine monthly or three quarterly payments. You then compete a single, annual VAT return which is used to work out any balance owed by you or due from HMRC.
Retail and VAT Margin schemes – there are various retail schemes, but it depends on whether your retail turnover is below £1m over £130m or higher. Smaller businesses may be able to use a retail scheme with cash accounting and annual accounting.
Reverse charge VAT scheme – this was applied in March 2021 for the construction industry to tackle widespread ‘missing trader’ fraud. The reverse charge scheme makes the customer instead of the supplier responsible for accounting for VAT on providing labour.
Charge the right amount of VAT
Once you have registered for VAT, you must print your VAT number on all of your invoices and apply the correct rate of VAT to all relevant products or services. There are three different rates of VAT, which are:
Standard rate, 20% – most goods and services
Reduced rate, 5% – some goods and services, e.g., children’s car seats and home energy.
Zero rate, 0% – zero related goods and services, e.g., most food and children’s clothes.
Pay VAT on time
It may sound obvious, but there are penalties in place for businesses that miss VAT deadlines. If you are a new business, there is no penalty for missing a VAT deadline for the first time, you will only receive a warning.
However, if you fail to pay the VAT due on the date within the next five quarters, the surcharge will be 2% of the outstanding tax. This increases to 5% for the next default. Each default, whether it’s a late submission of the return or late payment, extends the surcharge liability, but only late payment incurs and surcharge.
Keep accurate records
It is important that as a VAT registered business, you keep complete and up-to-date records. This includes details of all suppliers, purchases and expenses. In addition, a VAT account should be maintained, which is a summery of output tax payable and input tax recoverable by the business. These records should be kept for six years.