Millhouses Accountancy Ltd

Millhouses Accountancy

2nd Floor, The Portergate

257 Ecclesall Road, Sheffield S11 8NX

Tel: 0114 345 0960

Mobile: 07450 989048

Email: info@millhouses-accountancy.co.uk

 
Accountancy practice in Sheffield

VAT Information & Advice

What is VAT ?

VAT is a tax that is charged on most goods and services provided by VAT registered businesses in the UK. Its also charged on goods and some services that are imported from countries outside the European Union (EU), and brought into the UK from other EU countries.

VAT is charged when a VAT registered business sells to another business or to a non-business customer.  A VAT registered business must account for the VAT recieved on sales to both business and non-business customers.  From this it may deduct the VAT it has paid on its expenditure to other businesses.  If the VAT received on sales is greater than that incurred on expenditure, the net amount must be paid over to HMRC.  Where VAT paid on expenditure is greater than the amount received on sales, a refund may be claimed from HMRC.  VAT is accounted for on a VAT return (usually quarterly) and payments made (or refunds claimed quarterly).  There are exceptions to this which are discussed later on.

Rates of VAT

There are three rates of VAT, depending on the goods or services a business provides.  These are as follows :

  • Standard Rate 20%
  • Reduced 5%
  • Zero Rated 0%

There are also some goods and services which are exempt from VAT and some which are outside the scope of VAT.

When must a business register for VAT ?

A business must register for VAT if any of the following conditions  apply :

  • If your turnover of VAT taxable goods or services supplied within the UK over the last 12 months exceeds £81,000 (the current registration threshold), or you expect it to go over that figure in the next 30 days.
  • If you take over a VAT registered business from someone else you have to add your turnover over the previous 12 months to that of the business you are taking over.  If the total goes over £81,000 on the day of the takeover you must register for VAT.
  • If you have received goods from other EU countries in the UK (these are known as acquisitions) with a total value greater than £81,000 in the current year since 1 January, or you expect to acquire more than that value in the next 30 days you must register for VAT.

Voluntary Registration for VAT

If your taxable turnover has not crossed the registration threshold you can voluntarily register for VAT.  There are advantages to this which are as follows:

  • There are potential cashflow advantages of being able to charge VAT on your sales and claim vat back on your purchases (depending on your circumstances).  
  • If you supply zero rated items and purchase standard rated items you could claim back all of the vat you have paid.  
  • If you have not sold anything during a VAT accounting period you may still be able to claim back the VAT on your purchases.
  • If you volunatarily register when you start up in business you won't have to raise your prices on customers when you exceed the VAT threshold and have to register for VAT.

Accounting schemes for VAT purposes

There are a number of different accounting schemes available which are designed to simplify your VAT and potentially save you time and money.  These are as follows :

Standard quarterly VAT Accounting

Using standard quarterly vat accounting you must account for all the vat on all invoiced amounts of both sales and purchases  every three months.  This is irrespective of  whether or not  the invoices have been paid.  You are required to complete a VAT return for each quarter.  The return along with any payment due must be submitted to HMRC by the 7th day of the second month after the return date.  So if one of your VAT quarters is the 31st December, the VAT return along with any payment due must be submitted to HMRC by the 7th February.

Annual Accounting

If you were to use the Annual Accounting scheme you would pay VAT on account throughout the year in nine monthly or three quarterly instalments.  These instalments are based on the VAT you paid in the previous year.  If you have been trading for less than a year they are based on an estimate of your VAT liability.

You only need to complete one VAT return at the end of the year.  Therefore it has the advantage of reducing your paperwork, and can make it easier to manage your cash flow  (you are still required to keep VAT records and accounts).  One  disadvantage is  you only receive one repayment at the end of the year.  Therefore if you are a business which regularly reclaims VAT, this scheme is not for you.

Cash Accounting

If you used Cash Accounting you would only pay the VAT once the customer has paid you.  You would only be able to claim back the VAT on your purchases once you had paid for them.

Cash Accounting is very beneficial for your cash flow (especially if your customers are slow to pay you).  Also if your customer never pays you then you don't have to pay the VAT, unlike standard VAT Accounting where you have to pay the VAT even if you never receive payment from your customer.

Cash Accounting may not be for you if you regularly reclaim more VAT than you pay or if you purchase a lot of goods and services on credit.

Flat Rate Scheme

Using the Flat Rate Scheme you do not calculate the VAT on each and every transaction.  Instead you simply pay a flat rate percentage of your turnover as VAT.

One advantage of using this scheme is that it makes it easier to do your bookkeeping. You don't have to worry about separating out gross, net and VAT for each transaction. The downside is that you can't reclaim the VAT on your purchases under this scheme. This means that you may purchase a lot of goods and services from VAT registered businesses and not be able to reclaim the VAT.  Also if you make a lot of zero-rated or exempt sales you could pay more VAT because you will still pay the flat rate percentage on your turnover for those sales, even though you are not charging VAT on those sales.

There are a range of flat rate percentages.  The one you use depends on what trade sector you are in.  Generally the percentage is less than the standard VAT rate becase it takes into account the fact you are not reclaimimg the VAT on purchases.

VAT scheme for retailers

If you sell high quantities of goods to the general public it can be very time consuming and costly to record the VAT on every single transaction.  There are several VAT retail schemes that can be used to simplify this.

With retail schemes you work out the total of your VAT taxable sales for a period and the proportions of that total that are taxable at different VAT rates (standard, reduced and zero).  You then apply the appropriate VAT percentage to those proportions to work out your VAT due.

The VAT retail scheme can only be used for supplies you make by way of retail and you must supply a VAT invoice to any VAT registered customer who requests one.

VAT information and advice