What is VAT?
Scope
VAT applies to any transaction where:
- there is a supply of goods or services
- made in the UK
- by a taxable person
- in the course or furtherance of business
The transaction is known as a “taxable supply”
Inputs and outputs
VAT is calculated on the sales of the business and is known as output VAT . Businesses can deduct any VAT they have suffered on their purchases, known as input VAT, from their total output VAT and are obliged to pay the net amount over to HMRC.
Supplies
Most taxable supplies are charged at the standard rate of 20%.
There is a reduced rate of 5% which applies to a small number of supplies such as domestic gas and electricity.
Some supplies are or zero-rated where the rate is 0%.
There are certain supplies that are not taxable and these are known as exempt supplies.
The crucial distinction between exempt and zero-rated supplies is:
- If your business only makes exempt supplies you cannot register for VAT and therefore cannot reclaim any input tax.
- If your business only makes zero-rated supplies you should register for VAT as although your supplies are taxable, it is at 0%, and you are able to reclaim any input tax you suffer.
Do you have to Register?
You must register for VAT if your taxable supplies (Sales) exceeds a set annual figure, £90,000 for 2024/25.
If your taxable supplies (Sales) are below the limit you can still apply if you believe it would be beneficial for you to do so, as in the example above where the business was only making zero-rated supplies. This is known as voluntary registration.
You can also register prior to making any taxable supplies as long as you intend to do so in the future; this allows you to reclaim the input tax on start-up expenses.
Taxable person
This is anyone who makes or intends to make taxable supplies and is required to be registered. For the purpose of VAT registration a person includes:
- individuals (if an individual has more than one business, it is the combined turnover of all businesses which will determine if the annual limit has been reached. If the limit is reached, all of the businesses of that individual must register for VAT). This doesn’t apply to Companies, each of which is a separate legal entity
- partnerships
- companies, clubs and associations
- charities
Administration
Once a business is registered for VAT, you must submit a VAT return to HMRC each quarter, showing amounts of input and output tax and other information and must be filed online.
Returns are due one month after the end of the period it covers, although generally an extra seven calendar days are allowed for online forms.
All businesses must pay any liability electronically.
Businesses who make zero-rated supplies and who receive VAT repayments may find it beneficial to submit monthly returns.
Any business with a turnover less than £1.35 million may apply to join the annual accounting scheme. They will make monthly or quarterly payments of VAT but will only have to complete one VAT return at the end of the year.
Record keeping
All VAT registered businesses are required to keep detailed and up to date records of all sales, purchases and expenses. Furthermore, any input VAT claimed must be supported by a valid VAT receipt. These records should be kept for six years.
Inspection of records
The person registered for VAT is the person responsible for the proper maintenance of records and calculation of the VAT liability. Periodically, a VAT officer from HMRC may visit to inspect the business records.
Penalties
HMRC have extensive powers to apply penalties where businesses have failed to or have incorrectly applied the VAT regulations. Penalties can be applied in respect of:
- late returns or late payments
- late registration
- errors in returns
Cash accounting scheme
If the annual turnover of your business does not exceed £1.35 million, you are permitted to calculate VAT based on the cash you pay out and the cash you receive rather than on the date of each invoice or receipt.
Retail schemes
There are special schemes for retailers to ensure that it is impractical for retailers to maintain the records required of a VAT registered business.
Flat Rate scheme
Smaller businesses can elect to join the flat rate scheme whereby they pay VAT as a percentage of their total business income/turnover and do not reclaim any input VAT, except in the case of business assets which cost at least £2,000. This scheme was introduced by HMRC in an attempt to simplify VAT for small businesses. Some businesses will find that there is a cash saving in using the scheme.
VAT Flat Rate Scheme Changes – 1st April 2017
From 1st April 2017, the government introduced a new definition of a ‘limited cost trader” (see definition below) to the flat-rate vat scheme. The result is that affected contractors must use a new percentage of 16.5% The introduction of this new rate means the flat rate scheme is no longer suitable for the vast majority of Contractors who will now generally be better suited to the standard rate VAT scheme, where they can at least offset some of the VAT paid on purchases against what they have to pay HMRC.
The definition of the newly introduced category of a “limited cost trader” is one whose VAT “inclusive” expenditure on “goods” is either; less than 2% of their VAT inclusive turnover, or less than £1,000 in total, per year.
If you are unsure which VAT scheme will be most suitable for you, please contact our team on 02476 426360 who will be happy to advise you.
How can we help?
It is essential that you comply with all VAT regulations in order to avoid costly penalties. We can assist you by:
- Providing access to our online accounting software which will ensure that your record keeping is up to date and all VAT information is available.
- Completing & submitting your VAT returns
- advising you which schemes are available and which one is most appropriate for you.
If you would like to discuss any of the points mentioned above please contact us.
