Value Added Tax (VAT) is a tax that is charged at any point in which a product increases in value – and is collected by HMRC.
VAT applies to all good and services that a business supplies to others in the UK. Your business must pay VAT whether it is selling B2B (Business-to-business) or B2C (Business-to-consumer) in the UK, although the nature of supply can change the VAT treatment of a sale when it is made overseas. Whilst all businesses are required to pay VAT, as long as you are registered, you will be able to reclaim the VAT you pay on any business expenses. All businesses must register for VAT once their turnover crosses a certain threshold which currently stands at £85,000. It is worth noting that this changes annually, and you should therefore always be aware of what the threshold is to ensure you do not accidently cross it and open yourself up to a possible fine. If you do cross this £85,000 threshold, you will have 30-days in which to register for VAT with HMRC. There are numerous benefits and disadvantages to registering for VAT voluntarily, even if your business is not expected to reach the £85,000 threshold. Below is a brief breakdown of these:
Benefits of registering for VAT
- You can reclaim some VAT – When purchasing supplies for business purposes, such as computers and other office equipment, you will be required to pay VAT on these. However, if you are registered for VAT, you can reclaim this VAT back from the government.
- Creates a stronger image – As all businesses with a turnover of over £85,000 are required to register for VAT – it can serve as a positive indication of the stature of your company to customers and suppliers – even if your turnover is, in fact, lower than this.
Disadvantages of registering for VAT
- Your prices will rise – By adding VAT to your products/services, your prices will of course rise. However, it is more than likely that your competitors will also be adding VAT to their prices, and therefore this often balances the market out. Furthermore, if your customers are VAT-registered businesses they will be able to reclaim this VAT back themselves.
- It’s more work – By registering for VAT, you will have to submit quarterly VAT returns; increasing the amount of accounting you will have to do.
Choosing the right VAT scheme for your business
You have certain choices when it comes to how you report your VAT to the government. Below is a brief overview of the most common forms of VAT scheme currently available:
Standard VAT accounting method
This is the most common form of VAT reporting and simply involves keeping an accurate account of all VAT on purchases and sales on an invoice-date basis. Traditionally done manually in a logbook, many businesses now use accounting software, such as Quant App. Collected quarterly, this information collected using Standard VAT Accounting is then submitted to HMRC. You will be required to pay any additional VAT due, or alternatively get a refund if you have overpaid.
Annual accounting VAT scheme
This form of VAT reporting is essentially the same as the above Standard VAT Accounting Method except that you submit your VAT annually rather than quarterly. Once completed, you will then be required to pay the VAT you estimate you will owe in quarterly installments. Whilst this does allow businesses to spread the payment over the year, because it is an estimate, you may find yourself being owed VAT from the government, or worse, owing them. Any business with a turnover of more than £1.35 million cannot use the Annual Accounting VAT scheme.
Flat rate scheme
This scheme is only available to businesses with an annual turnover of £150,000 or less. This scheme involves paying VAT as a flat percentage of your estimated annual turnover. There are various flat rates – varying depending on the type of industry you are operating. Whilst you will still be required to charge VAT, you are not required to keep records of every sale and purchase.
Cash accounting scheme
Cash accounting means you report VAT when you are paid, as opposed to when you send an invoice. The obvious benefit of this is that you will not suffer should your own customers be late in paying you. However, likewise, you are unable to reclaim VAT until a payment has been made in full – making it less suitable for businesses that predominantly use credit to make purchases.
Choosing the right scheme for you
As you can see, there are a number of VAT schemes available to you, and numerous factors that affect these – from the size of your business and the industry you operate in, to whether you want to reduce accounting admin or spread payments over the year. Because of this, you are recommended to speak to an accountant to help find the best scheme for your business. When selecting an accountant, a useful tip is to seek one that already has clients operating in your industry. This will help to ensure you get the right scheme for you as they will be more aware of the advantages and disadvantages of these in relation to your industry’s requirements.
Your legal obligation regarding VAT
If your business crosses the £85,000 annual turnover threshold you are legally required to register for VAT. You will therefore need to maintain your VAT accounting records using one of the above schemes – this legal obligation also applies to businesses that have voluntarily registered for VAT even if they have not passed the £85,000 total. Whilst it may seem like a lot of work, it does not have to be, and through a combination of an accountant and automated software, capturing and submitting this information can be done quickly and with a minimum of fuss. At Quant we can provide an end-to-end solution on your behalf to ensure VAT doesn’t become a headache for your business.
HMRC takes VAT payments very seriously, and therefore once you are registered for VAT, you must ensure that you keep accurate records of everything related to this. Failure to comply with current VAT laws can result in large fines being imposed upon you by HMRC. Such failure can include filing your quarterly/annual reports late, providing information that is inaccurate or incomplete and making VAT payments after the required deadline.