VAT is a tax payable by the consumer but many businesses are forced to act as unpaid tax collectors. There are heavy fines for failing to operate the system properly consequently, you cannot just ignore VAT and there are certain areas you should consider in detail
What does VAT apply to?
VAT applies to businesses that make supplies of goods or services Businesses charge VAT on their soles and this is known as output VAT. Similarly, VAT will be suffered on purchases and this is known as input VAT.
If outputs exceed inputs, payments of tax have to be made to HMRC on a regular basis. If inputs exceed outputs, a repayment of tax will be made to the business. However, there are some types of input VAT, such as VAT on entertainment that may not be reclaimable.
Certain supplies are not taxable at all and are known as exempt supplies. Others are taxable at the zero rate (0%), reduced rate (5%) or standard rate (17.5%). It is proposed to increase the standard rate to 20% for any supply made on or after 4 January 2011. If the business makes totally exempt sales, you cannot register for VAT or reclaim any of the input VAT suffered. This can affect the competitiveness of your business. If the business makes zero rated sales, you can register and reclaim the input tax suffered. Your business can benefit significantly in this situation However, what constitutes an exempt or zero rated supply can be difficult to decide and may need careful consideration.
Do I Need to Register?
You only have to register if the taxable supplies made by the business exceed dn annual figure, currently £70,000 If your supplies fall below this you may be able to register voluntarily and obtain a repayment This usually happens when you are making zero rated sales
If you are setting up a business but have not yet started mdking supplies, you should register so that you can reclaim your input tax on start-up expenses.
You must keep detailed records of purchases, sales and expenses, as well as a summary of input and output tax these records must be kept for six years. Failure to do so can lead to substantial penalties
When do I have to Make a Return to HMRC?
Generally, once registered you will make a quarterly return to HMRC. summarising the outputs and inputs. It must reach HMRC within one month after the end of the quarter
Businesses that make zero rated supplies and receive repayments of VAT may find it beneficial to submit monthly returns
Businesses with expected annual taxable supplies under £1,350,000 may apply to join the annual accounting scheme whereby they will make monthly or quarterly payments of VAT but will only hove to complete one tax return at the end of the year.
Inspection of Records
The maintenance of records and calculation of the liability is the responsibility of the registered person but HMRC will need to be able to check that the correct amount of VAT is being paid over From time to time therefore an HMRC officer will come and inspect the business records
The HMRC officer will want to ensure that VAT is applied correctly and that the returns and other VAT records are properly written up.
Offences and Penalties
HMRC have wide powers to penalise businesses who ignore or incorrectly apply the VAT regulations Penalties can be levied in respect of the following:
- late returns/payments
- late registration
- • Errors in returns.
VAT – Cash Accounting
Cash accounting enables a business to account for and pay VAT on the basis of cash received and paid rather than on the basis of invoices issued and received.
Advantages and Disadvantages of the Scheme
The advantages of the scheme are as follows.
The potential disadvantages are as follows.
From 1 April 2007 a business can join the scheme if it has reasonable grounds for believing that taxable turnover in the next 12 months will not exceed £1,350,000 provided that it:
All standard and zero-rated supplies count towards the £1,350,000 except anticipated sales of capital assets previously used within the business. Exempt supplies are excluded.
When a business joins the scheme, it must be careful not to account again for VAT on any amounts already dealt with previously on the basis of invoices issued and received.
A business can start using the scheme without informing HMRC. It does not cover:
Once annual turnover reaches £1,600,000 the business must leave the scheme immediately.
On leaving the scheme, VAT is due on all supplies on which it has not already been accounted for. However outstanding VAT can be accounted for on a cash basis for a further six months after leaving the scheme.
Accounting for VAT
Output tax must be accounted for when payment is received.
Cheque. Treated as received on the date the cheque is received or if later the date on the cheque. If the cheque is not honoured an adjustment can be made.
Credit/debit card. Treated as received/paid on the date of the sales voucher.
Standing order/direct debits. Treated as received/paid on the day the bank account is credited.
Part payments. VAT must be accounted for on all receipts/payments even where they are part payments. Part payments are allocated to invoices in date order (earliest first) and any part payment of an invoice allocated to VAT by making a fair and reasonable apportionment.
Under the cash accounting scheme the prime record will be a cash book summarising all payments made and received with a separate column for VAT. The payments need to be clearly cross-referenced to the appropriate purchase/sales invoice.
In addition the normal requirements regarding copies of VAT invoices and evidence of input tax apply.
How we can help
We can advise on whether the cash accounting scheme would be suitable for your business.
VAT Flat Rate Scheme
The flat rate scheme for small businesses was introduced to reduce the administrative burden imposed when operating VAT.
Under the scheme a set percentage is applied to the turnover of the business as a one-off calculation instead of having to identify and record the VAT on each sale and purchase you make.
Who can join?
The scheme is optional and open to businesses whose:
Turnover for either purpose does not include proceeds from the sale of capital assets.
The turnover test applies to your anticipated turnover in the following 12 months. Your turnover may be calculated in any reasonable way but would usually be based on the previous 12 months if you have been registered for VAT for at least a year.
To join the scheme you can apply by post, email or phone and if you are not already registered for VAT you must submit a form VAT1 at the same time.
You may not operate the scheme until you have received notification that your application has been accepted and HMRC will inform you of the date of commencement.
When is the scheme not available?
The flat rate scheme cannot be used if you:
In addition the scheme cannot be used if, within the previous 12 months, you have:
The scheme will clearly be inappropriate if you regularly receive VAT repayments.
How the scheme operates
VAT due is calculated by applying a predetermined flat rate percentage to the business turnover of the VAT period. This will include any exempt supplies and it will therefore not generally be beneficial to join the scheme where there are significant exempt supplies.
The percentage rates are determined according to the trade sector of your business and range from 3.5% to 13%. The table in the appendix to this factsheet summarises the percentages. In addition there is a further 1% reduction off the normal rates for businesses in their first year of VAT registration. The percentages used in the scheme will change from 4 January 2011 to reflect the increase to 20% in the standard rate of VAT.
If your business falls into more than one sector it is the main business activity as measured by turnover which counts. This can be advantageous if you have a large percentage rate secondary activity and a modest major percentage trade. You should review the position on each anniversary and if the main business activity changes or you expect it to change during the following year you should use the appropriate rate for that sector.
Although you pay VAT at the flat rate percentage under the scheme you will still be required to prepare invoices to VAT registered customers showing the normal rate of VAT. This is so that they can reclaim input VAT at the appropriate rate.
Example of the calculation
Cook & Co is a partnership operating a café and renting out a flat. If its results for 2010 are as follows:
Flat rate 11% x £79,000 = £8,690
Normally £70,000 x 17.5/117.5 = £10,426 less input tax
Treatment of capital assets
The purchase of capital assets costing more than £2,000 (including VAT) may be dealt with outside the scheme. You can claim input VAT on such items on your VAT return in the normal way. Where the input VAT is reclaimed you must account for VAT on a subsequent sale of the asset at the normal rate instead of the flat rate.
Items under the capital goods scheme are excluded from the flat rate scheme.
Transactions within the European Community
Income from sales of goods is included in your turnover figure.
Where there are acquisitions from EC member states you will still be required to record the VAT on your VAT return in the normal way even though you will not be able to reclaim the input VAT unless it is a capital item as outlined above.
The rules on services are complex. Please get in touch if this is an issue so that we can give you specific advice.
Records to keep
Under the scheme you must keep a record of your flat rate calculation showing:
You must still keep a VAT account although if the only VAT to be accounted for is that calculated under the scheme there will only be one entry for each period.
The scheme is designed to reduce administration although it will only be attractive if it does not result in additional VAT liabilities. The only way to establish whether your business will benefit is to carry out a calculation and comparison of the normal rules and the flat rate rules.
How we can help
We can advise as to whether the flat rate scheme would be beneficial for your business and help you to operate the scheme. Please do not hesitate to contact us.
Table of sectors and rates
“Labour-only building or construction services” means building or construction services where the value of materials supplied is less than 10 per cent of relevant turnover from such services; any other building or construction services are “general building or construction services”.
VAT – Bad Debt Relief
It is quite possible within the VAT system for a business to be in the position of having to pay over VAT to HMRC while not having received payment from their customer.
Bad debt relief allows businesses that have made supplies on which they have accounted for and paid VAT but for which they have not received payment to claim a refund of the VAT by reference to the outstanding amount.
The Conditions for Relief
In order to make a claim a business must satisfy the following conditions:
Making the Claim
A claim is made by entering the appropriate amount in Box 4 of the VAT return for the period in which entitlement to the claim arises (or any permissible later period).
Businesses making bad debt relief claims must keep records for four years from the date of the claim to show:
Repayment of Input Tax by Purchaser
Where a customer has not paid a supplier within six months of the date of the supply or, if later, the date payment is due, VAT previously claimed as input tax, must be repaid. This puts a burden on all VAT registered traders to monitor their transactions to anticipate whether they need to reverse any input tax recovered on goods received from suppliers.
How we can help
We would be pleased to help with further advice in this area.
There are special schemes for retailers as it is impractical for most retailers to maintain all the records required of a registered trader.
Flat Rate Scheme
This is a scheme allowing businesses with taxable turnover not exceeding £150.000 end total turnover not exceeding £225,000 to poy VAT ds a percentage of their total turnover. Therefore no specific claims to recover input tax need to be made. The aim of the scheme is to simplify the way small businesses account for VAT.
Annual Accounting Scheme?
The annual accounting scheme helps small businesses by allowing them to submit only one VAT return annually rather than the normal four. During the year they pay instalments based on an estimated liability for the year with a balancing payment due with the return. The scheme is intended to help with budgeting and cash flow and reduce paperwork.
Joining the Scheme
A business can apply to join the scheme if it expects taxable supplies in the next 12 months will not exceed £1,350,000.
Businesses must be up to date with their VAT returns and cannot register as a group of companies.
Application to join the scheme must be made on form 600(AA) which can be found at the back of VAT Notice 732. HMRC will advise the business in writing if the application is accepted.
Paying the VAT
Businesses that have been registered for 12 months or more will pay their VAT in nine monthly instalments of 10% of the previous year’s liability. The instalments are payable at the end of months 4-12 of the current annual accounting period.
Alternatively such businesses may choose to pay their VAT in three quarterly instalments of 25% of the previous year’s liability falling due at the end of months 4, 7 and 10.
The balance of VAT for the year is then due together with the VAT return two months after the end of the annual accounting period.
Businesses that have not been registered for at least 12 months may still join the scheme but each instalment – whether monthly or quarterly – is based on an estimate of the VAT liability.
In all cases HMRC will advise the amount of the instalments to be paid.
The annual accounting period will usually begin at the start of the quarter in which the application is made. If the application is made late in a quarter it may begin at the start of the next quarter.
All businesses are able to apply to HMRC to change the level of the instalments if business has increased or decreased significantly.
Leaving the Scheme
Any business can leave the scheme voluntarily at any time by writing to HMRC.
A business can no longer be in the scheme once its annual taxable turnover exceeds £1,600,000.
Advantages of the Scheme
- A reduction in the number of VAT returns needed each year from four to one.
- Because the liability to be paid each month is known and certain, cash flow can be managed more easily.
- There is an extra month to complete the VAT return and pay any outstanding tax.
- It should help to simplify calculations where the business uses a retail scheme or is partially exempt.
Interim payments may be higher than needed because they are based on the previous year. However, they can be adjusted if the difference is significant.
A business is obliged to notify HMRC if the VAT liability is likely to be significantly higher or lower than in the previous year.
How we can help
We can help you to plan your VAT administration and consider with you whether the annual accounting scheme would be beneficial for your business.
Please talk to us if you are interested in any of the special schemes. Most problems with VAT arise from poor record keeping and lack of understanding of the VAT system. Remember, we can help you with both and make life a lot simpler so please call Keith Rogers Accountants on +44 (0) 20 3145 0995 so we can arrange a No obligation FREE initial meeting at one of our offices.