Tax Advice

The Definitive Value Added Tax (VAT) Guide

08 May 2018

VAT or Value Added Tax is a consumption tax applied to the majority of products and services sold in the UK. (As long as the business selling the goods or services is VAT registered.)

Unlike other types of taxes, HMRC collects VAT via registered businesses. Once your business is registered for VAT, you must charge VAT for any service that you provide or product you sell. Again, more on this later.

VAT is currently charged at three different rates.

  • The standard rate: 20%
  • The reduced rate: 5%
  • The zero rate: 0%

Confusingly, some goods and services are completely exempt from VAT. Yes, exempt goods and zero-rated goods sound similar but they are actually very slightly different. (More on that in a future blog, though!)

If your business turns over more than £82,000 over a 12-month period, you must register for VAT, charge VAT to your customers and repay the VAT to HMRC every quarter.

If your business falls below the £82,000-threshold, you might benefit from voluntarily registering for VAT. There’s a load of reasons but essentially it looks more professional and allows you to reclaim the VAT on purchases your business makes.

 

VAT schemes

After your business becomes VAT registered, you will have access to Standard VAT accounting. There are, however, other schemes available for your business but they depend on the amount of money your business takes in.

 

Standard VAT accounting scheme

The default scheme is the standard VAT accounting scheme. With this scheme, your business has the power to reclaim VAT as soon as an invoice is received from a supplier. Your business is also liable for VAT at the point you send an invoice to a customer. That means you are liable for the VAT even if your customer hasn’t paid you.

 

Flat Rate Scheme

The Flat Rate Scheme is designed to help small businesses take care of their VAT administration. Instead of spending time and effort meticulously tracking VAT, the flat rate scheme allows businesses to calculate their VAT payment as a percentage of turnover.

 

Eligibility

If your business’ VAT taxable turnover is less than £150,000, you can apply for the Flat Rate Scheme.

Advantages

  • Easier record keeping.
  • You can be confident and consistent with the amount you need to pay.

 

Cash Accounting Scheme

With the cash accounting scheme, VAT is only payable once your customer has actually paid you. But, you will need to take into consideration that you cannot reclaim the VAT on purchases until you, yourself, have paid for them.

 

Eligibility

If your VAT turnover is less than £1.35m, you can use this scheme.

Advantages

  • Good for cash flow, especially for slow paying customers.
  • Useful for business in case of bad debts.

 

Annual Accounting Schemes

This scheme allows you to pay VAT owed throughout the year in three quarterly or nine monthly instalments. These instalments depend on the VAT you paid in the previous year.

 

Eligibility

If your estimated VAT turnover is less than £1.35m, you can use this scheme.

Advantages

  • Less paperwork involved; you only need to complete one return annually.
  • Easier to manage cash flow.
  • Make additional payments when you wish.

 

Submitting VAT

If you are registered for VAT, you need to submit VAT on a regular basis, which is usually once every three months.. This is known as your “Accounting Period”.

The return shows:

  • VAT charged on sales to customers – output tax
  • Vat paid on purchases to your supplies – input tax
  • If output tax is more than input tax, you pay the difference to HMRC
  • If the input tax is more than the output tax, you can claim the difference from HMRC
  • You must send a VAT return even if you have a nil return