VAT – an overview
Editors Note: Expert content needs an expert content writer and Yorkshire Powerhouse is pleased to publish this business advice article on business taxation, kindly written by a real expert in his field – Donald Inglis of Inglis Chartered Accountants.
Please consider contacting Donald for any aspect of tax advice, accountancy, bookkeeping or cloud accounting – just click on the advert links above or below – and please mention Yorkshire Powerhouse if you do make contact.
VAT came to the UK in 1973 when we joined the EU – even though we have now left the EU, sadly we have not left VAT….
For an idea of importance to the treasury, in 2019 – 2020 VAT accounted for £148 billion from VAT, for a comparison corporation tax was £52 billion.
With the Treasury (and by default HMRC) needing as much money as possible to recover from covid, the Ukraine crisis, rising inflation and interest rates – VAT is now more important than ever. This means that businesses must be more careful than ever to make sure it is correctly calculated.
Do you have to register for VAT?
Many businesses decide to register for VAT before their turnover reaches the £85,000 threshold. The main reasons are as follows;
- The perception is that your business is bigger than it is and has a turnover of at least £85,000 – even though it might be much less than this.
- If you are normally trading business to business then it is likely your customers will also be VAT registered, so there is no increase in cost to them.
- If you have paid VAT on your purchases, then you can reclaim this VAT.
However, if your vatable turnover is over £85,000, then you must VAT register. Vatable turnover is normally sales – but do take great care with this if you are involved in the sectors with trickier rules e.g. construction and property rental.
VAT is usually paid quarterly, but it doesn’t necessarily run in line with your financial year, depending on when you registered. However, this can be changed so your VAT periods and accounts are co-terminous. In order to calculate the amount that you have to pay, you subtract input tax (the amount you can reclaim from purchases) from output tax (the tax you charge customers on sales) and pay (or reclaim) the difference.
Amount to pay to HMRC = Output Tax – Input Tax
With Making Tax Digital now in full force you must file your return online and normally via accounting software e.g. Xero, Sage, Quickbooks etc.
I have heard there are different schemes available – what are they all about?
The good news is that there are a number of different schemes available to certain companies that meet specific criteria. In general, they help with cash flow or paperwork – as opposed to reducing the amount of VAT to pay.
We will now have a look at the 4 main schemes;
Your VAT is simply the difference between your invoiced sales and your purchase invoices received. This is then paid across to HMRC.
For smaller businesses (sales less than £1.35 million) it is calculated as the amount of VAT received on sales and paid on purchases as opposed to invoiced. This makes no difference to the amount of VAT payable overall, but if customers take 60 days to pay, then you only pay the VAT on that invoice when it is paid. This can make a huge difference to your cash flow.
There is no requirement no notify to HMRC that you are using this scheme. If you are thinking of changing from standard to cash (or vice versa), then please, please take advice from your accountant – as you need to take into account VAT on receivables and payables. It is not as straightforward as it might first appear.
Flat Rate Scheme
The flat rate scheme was brought in as being simple, but sadly it is anything but. The amount you pay is based on the industry you operate in. You pay a flat rate of VAT that is calculated as a percentage of your turnover including VAT. This is less than the standard rate of 20%, however, you can’t reclaim VAT on purchases so you definitely need to be cautious about whether you’ll be better off or not. In order to use this scheme, you must first obtain permission from HMRC.
Annual Accounting Scheme
In this scheme, you provide just one return per year to HMRC, and make equal payments throughout the year. The amount you pay is calculated based on the previous year’s VAT liability and can help some companies with cash flow management. The difficulty with this is that if you are growing rapidly, then the following year you will have a large increase in VAT which you may not have budgeted for.
I hope the above helps and gives a very brief outline as to what VAT is all about. Unfortunately VAT is one of the most complicated and illogical taxes there is. It is certainly not straightforward and if you are unsure at all then contact a professional.
To find out which scheme would be best for your business, or to get advice on when to register your company, we recommend speaking to an accountant. A good accountant can ensure that you’re paying the correct amount of VAT and advise you as to which scheme would be most beneficial.
VAT thinking – Yorkshire Powerhouse
Have you any questions?
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