VAT – an overview
Registering for VAT with HMRC means that you must charge VAT on your sales, but you may reclaim it on your purchases to offset your tax bill.
The standard rate VAT is currently charged at 20%, and applies to both business customers and consumers. You must register for VAT once your taxable sales reach £85,000. Taxable sales in this case is essentially your annual turnover.
VAT is usually paid quarterly, but doesn’t necessarily run in line with your financial year, depending on when you registered. To calculate the amount that you have to pay, you need to look at output tax (the tax you charge customers on sales) and input tax (the amount you can reclaim from purchases).
Amount to pay to HMRC = Output Tax – Input Tax
You can file your return online, and the HMRC portal allows you to check your balance and compare the previous period’s return. You can also generate your VAT return through your accountancy software, or with the help of an accountant.
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Registering before you meet the threshold
Many companies decide to register for VAT before they reach the £85,000 threshold. This could be related to the amount you can reclaim. If you make a considerable amount of purchases, your input tax may be higher than your output tax (tax charged on sales), which means you’ll be entitled to a refund from HMRC.
Another reason for registering before it becomes a legal requirement is to improve the public perception of your company. It may help your company to appear larger than you are, improving the impression you give to potential clients. Your clients will be aware of the £85,000 turnover threshold, so they’ll think your turnover is high, even if it isn’t!
The different schemes available
The VAT system is not as straightforward as it might seem. There are different schemes and rates available to certain companies that meet specific criteria.
Your VAT is payed on the sales you make in the period at 20%, and you deduct all taxable purchases to calculate your return. This means that the amount to pay is calculated based on the work you’ve invoiced for, and not the money that you have received.
This works well for businesses who are paid in arrears, so, for example if you have payment terms of “Net 30” or “Net 45”. This means your customers have a longer period of time to pay off their invoices, and you will only pay VAT on the money you have received or paid out.
Flat Rate Scheme.
The flat rate scheme is fairly complex, and depends on the industry you operate in. You pay a flat rate of VAT that is calculated as a percentage of your turnover. This is usually less than the standard rate of 20%. However, on the flat rate scheme, you can’t reclaim VAT on purchases so you definitely need to be cautious about whether you’ll be better off or not.
Annual Accounting Scheme.
On 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.
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
You’ve read our introduction to VAT – have you any questions?
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