VAT – All You Need To Know


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What Is VAT?

  • Value Added Tax (VAT) is a general, broadly based consumption tax that is assessed on the value added to goods and services.
  • It applies to all goods and services that are bought and sold for consumption in the EU.
  • VAT is collected on behalf of HM Revenue & Customs (HMRC) by businesses and or individuals that are VAT registered.

What Are The VAT Rates?

  • The rates vary depending on the type of goods or services that are being supplied.
  • In general, there are four types of categories that goods fall into
  • Standard Rate @ 20% – this applies to most goods and services.
  • Reduced Rate @ 5% – mainly applied to fuel and power
  • Zero Rate @ 0% – applies to certain goods and services
  • Exempt Supplies – e.g. Postage Stamps, Insurance, Bank charges

Do I Need To Register For VAT?

  • To register for VAT – visit our VAT Registrations Page
  • You must register for VAT if you VAT taxable turnover exceeds the current “threshold” which is £85,000.
  • You may also apply for voluntary registration if your turnover is below the threshold and must pay HMRC any VAT you owe from the date they register you.
  • Compulsory Registration – You must register for VAT if:
  • you expect your VAT taxable turnover to be more than £85,000 in the next 30-day period
  • your business had a VAT taxable turnover of more than £85,000 over the last 12 months
  • You must register if you realise that your total VAT taxable turnover is going to be more than £85,000 in the next 30-day period.
  • You have to register by the end of that 30-day period. Your effective date of registration is the date you realised, not the date your turnover went over the threshold.
  • You must register if, by the end of any month, your total VAT taxable turnover for the last 12 months was over £85,000.
  • You have to register within 30 days of the end of the month when you went over the threshold. Your effective date of registration is the first day of the second month after you go over the threshold.
  • You will need to register if you only sell goods or services that are exempt from VAT or ‘out of scope’ but you buy goods for more than £85,000 from EU VAT-registered suppliers to use in your business.
  • Note: If you Register late you are liable to pay to HMRC what you owe from when you should have become VAT registered. You may be charged a penalty for late registration!

What Different VAT Schemes Are Available?

  • Annual Accounting Scheme
    • With this scheme you are only required to submit one VAT return per year.
    • You must make advanced instalments towards your final VAT liability, based on last year’s return.
    • After submitting the VAT return you either make a final payment or apply for a refund, depending on the total liability and total payments on account made.
    • You can only join this scheme if your estimated taxable turnover is £1.35M or less.
  • Cash Accounting Scheme
    • With this scheme you only pay VAT on sales when your customer pays you.
    • Also, you may only reclaim VAT on purchases once you have paid your supplier.
    • This is beneficial if you offer credit to you customers and can ease the burden on cashflow by deferring VAT payments.
    • You can only join this scheme if your estimated taxable turnover is £1.35M or less.
  • Flat Rate Scheme
    • you pay a fixed rate of VAT to HMRC
    • you keep the difference between what you charge your customers and pay to HMRC
    • you can’t reclaim the VAT on your purchases – except for certain capital assets over £2,000
    • To join the scheme your VAT turnover must be £150,000 or less (excluding VAT), and you must apply to HMRC.
    • Click on this link for more detail on the Flat Rate Scheme (FRS).
  • Margin Schemes
    • VAT margin schemes tax the difference between what you paid for an item and what you sold it for, rather than the full selling price. You pay VAT at 16.67% (one-sixth) on the difference.
    • You can choose to use a margin scheme when you sell:
    • second-hand goods
    • works of art
    • antiques
    • collectors’ items
    • You can’t use a margin scheme for:
    • any item you bought for which you were charged VAT
    • precious metals
    • investment gold
    • precious stones
  • VAT Retail Schemes
    • If you sell goods you must calculate how much VAT to record in your VAT account.
    • For goods sold inclusive of VAT, you must deduct the VAT you have to record. For goods sold exclusive of VAT, you must add it.
    • VAT retail schemes can make calculating your VAT simpler. Instead of calculating the VAT for each sale you make, you do it once with each VAT return.
    • There are 3 standard VAT retail schemes:
    • Point of Sale Scheme – you identify and record the VAT at the time of sale
    • Apportionment Scheme – you buy goods for resale
    • Direct Calculation Scheme – you make a small proportion of sales at one VAT rate and the majority at another rate
    • If your turnover excluding VAT is over £130 million you must agree a bespoke retail scheme with HM Revenue and Customs (HMRC).
    • You can use a retail scheme together with the Cash Accounting Scheme and the Annual Accounting Scheme.
    • You can’t use retail schemes with the Flat Rate Scheme.

What Records Do I Need To Maintain?

  • You must keep VAT Records for at least 6 years.
  • If signed up to “Making Tax Digital” (MTD), you must keep a digital record of all VAT applicable items.
  • Examples of VAT Records include the following:
    • Copies of all invoices you’ve issued or received
    • Self-billing agreements
    • Debit and credit notes
    • Import and export records
    • Records of anything you can’t reclaim VAT on
    • Records of goods
    • A register of your VAT accounts
  • You must also keep general business records such as bank statements, cash books, cheque stubs, paying-in slips and till rolls.

VAT Filing Reminders

  • Approaching the VAT period end, a reminder will be sent to you to ensure you file the VAT Return on time
  • To submit the return go to the HMRC Services: Sign in or register page on GOV.UK to sign in.
  • Alternatively, if you use accounting software, in most cases you can use it to quickly prepare and submit your VAT return directly to HMRC
  • You’ll need to pay your VAT bill by the deadline shown on your VAT return. You may have to pay a surcharge if you don’t pay on time.
  • For details of the due date for returns and payments go to the VAT Returns guide on GOV.UK.
  • The easiest way to avoid missing a payment deadline is to pay by Direct Debit.

How Do I Pay My VAT Liability?

  • Visit the HMRC website for payment advice and guidance.
  • Speak to a member of the Avar Team for any further information.

Benefits Of Volutntary VAT Registration

  • Helps smaller business dealing with larger customers as it often gives the perception of being a larger, more reputable and established business.
  • Beneficial to businesses that purchase Vatable goods as they are able to reclaim the VAT.
  • Businesses may be able to claim input VAT from the previous 4 years.

Downside Of VAT Registration

  • The major limitation to being VAT registered is that businesses must include VAT in their sales price.
  • If selling to individuals and businesses that are not VAT registered, this would make it more expensive for your customers who are not able to reclaim the VAT.
  • Another downside is that you are required to keep additional records and paperwork increasing administration costs.
  • There are surcharges, penalties and interest for late VAT returns and mistakes on VAT returns.

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