VAT accounting is one of those issues that effect almost every commercial enterprise in one form or the other. It provides a lot of new business owners with sleepless nights. However, it can be easy to understand and simple to apply if you get the proper explanation of the basics.
Value added tax (VAT) is the government’s way of collecting a tax on goods and services sold in the UK, familiar to most as it adds extra pennies when purchasing something. But for businesses, VAT can make or break their success so it’s essential that your VAT strategy be carefully thought out and implemented correctly.
Who needs to register for VAT?
Under certain conditions, businesses must register for VAT. One such circumstance is when their taxable turnover surpasses a certain threshold in any 12-month period – this threshold varies each year and the threshold for past and present years can be found on Revenue’s website.
Alternately, your business may need to register for VAT if it acquires another existing business and you anticipate that its combined taxable turnover exceeds the threshold. If it is currently VAT-registered but you believe you can stay below it without breaching threshold, voluntary registration could be available as a solution.
Register for VAT when buying goods or services from another EU country; in these instances, the authorities of that nation require that you pay VAT to them directly.
Registering for VAT requires periodic returns as well as payments, to avoid financial penalties from HM Revenue and Customs (HMRC). Failure to meet these requirements could incur substantial financial penalties from HMRC.
How do you register for VAT?
VAT is an indispensable requirement of most UK businesses. It must be charged on any goods or services sold – regardless of whether that sale occurs between businesses or between businesses and consumers – while businesses registered for VAT can reclaim any VAT they paid when covering expenses (provided they can prove they paid it).
Your annual taxable turnover must surpass the registration threshold, currently set at PS85,000. To quickly ascertain where you stand, HMRC provides an online VAT registration calculator which you can use.
HMRC recommends keeping detailed records of your sales and purchases, including VAT components where relevant, even when not VAT registered. This can assist if you decide to become VAT registered later on; additionally it helps track cashflow while calculating potential VAT refunds you might qualify for.
Registering for VAT requires filling out and submitting relevant forms through Revenue’s eRegistration service, either online or by post.
If you choose to apply online, simply log into Government Gateway using your details, select “Get another tax, duty or scheme”, complete all requested fields and submit any supporting documents necessary – your VAT number should arrive within 30 days!
Which VAT scheme is right for you?
When registering for VAT, there are various accounting schemes you can select as your accounting scheme of choice to make working out VAT easier and improve cash flow. There is an abundance of schemes available – making sure that you select one suitable for your business is paramount!
There are various schemes available for VAT tax filing and accounting, such as the VAT Flat Rate Scheme, Cash Accounting Scheme, Annual Accounting Scheme and Margin Schemes specifically for second-hand goods and art as well as special tour operator margin schemes.
For new businesses or those with low taxable turnover, the VAT Annual Accounting Scheme could be the optimal choice. This scheme involves making fixed monthly or quarterly payments throughout the year to reduce VAT paperwork and manage cash flow more easily, then at year’s end submitting one VAT return where you either need to make a balancing payment or receive a refund.
The VAT Flat Rate Scheme can be more challenging as you must consider whether your costs will increase or decrease over time, and keep in mind that if your taxable turnover surpasses £230,000 during any 12-month period, you must exit this scheme. Therefore, before choosing which VAT scheme best fits you it’s wise to consult an accountant first.
How do you pay VAT?
Most VAT payments are now made electronically or over the phone, and to verify your payment has reached HMRC, log into your VAT online account within 48 hours and check if your payment has gone through.
Pay your VAT payments online or over the telephone using your bank account, CHAPS, BACS or Direct Debit. Your 9-digit VAT registration number as well as HMRC sort code, account number and name will need to be provided when paying via these methods. Alternatively you could set up direct debit payments, paying automatically with fixed amounts each period using your VAT online account and banking details on hand.
VAT can be a complex subject, but with the proper software determining whether and when to register is straightforward. The challenge comes in keeping up with VAT returns and claiming back any VAT paid on business expenses.