VAT, also known as value added tax, is a form of tax levied by the state government on services and sales of goods. All companies presenting with a turnover of more than the current VAT threshold in their annual sales, currently £85,000, must register for VAT and complete a VAT return on a quarterly basis.
How Does VAT Operate?
When a company is registered for VAT, it is necessary to perform three tasks. Firstly, you must charge a VAT amount on all services or items sold to consumers or other business – currently 20% of the item. Next, you need to pay VAT on the services and goods purchased from other companies. Finally, you need to file a VAT return each quarter to the HMRC. The idea is that the VAT charged by your company and the VAT paid balance each other out, and any differences are noted in the VAT tax return where you are either receiving a refund for excess VAT paid or paying HMRC a VAT amount you owe.
The practical aspects of VAT or value added tax include the following:
- You need to register for VAT regardless of whether your company showed a turnover that exceeded the annual turnover amount in the past twelve months. If you believe the turnover will soon exceed the amount, currently £85,000, you will need to register for VAT as well.
- When adding VAT to invoices, you will need to indicate the VAT amount separately listing the overall services or goods cost before the VAT amount; it is only after this initial amount that you place the cost of VAT with the rate at which it is charged and the final amount owed.
- There are three separate VAT rates that can be charged to customers including the standard rate (currently 20%), the reduced VAT rate (currently 5%), and the zero VAT rate (0%). It should be noted that certain services and goods are exempt from value added tax, such as educational services and antiques.
- Certain VAT rules and regulations can be applied to specific industries and trades, such as the motor industry.
- A person can register for VAT payment using online services, such as via the Government Gateway website or www.gateway.gov.uk.
- The threshold for VAT amounts can change each year when the government announces an alteration in the upcoming annual budget. This will typically occur in March or April, so it is important you ensure you are charging consumers the correct VAT amount.
- Companies registered for VAT need to charge VAT on full sale prices, even if goods are accepted as barter or in part exchange for the item or service.
What Are The Different Things To Consider?
If your company sells items or services to another VAT-registered business, then adding value added tax to an invoice will be simple as they can reclaim any VAT being paid. If, however, you are selling items or services to individual consumers and have done so for a long period before being VAT-registered, then adding VAT amounts to increase the price can be difficult. You need to add on amounts by at least 20% to claim the VAT amount back. If you are not able to add this amount without influencing the sales made, then you may need to take a hit to your profit margin for some or all of the value added tax amount.
In addition to the standard VAT accounting process, there are three specific strategies designed to simplify the VAT procedure for smaller companies.
- The Flat Rate VAT Scheme
If your company presents with an annual turnover of less than £150,000, the business can opt to pay value added tax below the flat rate VAT scheme. The primary benefit of this scheme is that you do not need to keep a record of the VAT charged on each sale or payment for each purchase. Instead, you will need to calculate the VAT payments as a percentage of the overall VAT-inclusive turnover making VAT returns more straightforward to complete. You will not need to spend time determining how much value added tax was spent purchasing items either as flat rate VAT schemes do not include reclaiming VAT on purchases made by a small company. Instead, the percentage rate applied will be dependent on the industry sector and is typically between 10% and 15%. Of course in other nations this is different as this blog from Vatglobal shows.
- The Cash Accounting Scheme
If you utilize a standard VAT accounting method, you will need to pay the VAT charged on sales regardless of whether or not the consumer has paid for the item or service. When using case accounting schemes, your company only pays value added tax when the client pays for their item or service; however, you are only able to reclaim VAT when you have paid the various suppliers. Cash accounting schemes are useful if the company predicts an annual turnover of no more than £1 million.
- The Annual Accounting Scheme
If you choose to use standard VAT accounting, you will be required to complete a quarterly VAT return and pay for any overdue VAT amounts or receive refunds from the HMRC. It is possible to reduce the amount of paperwork by utilizing the annual accounting scheme, making it simpler to manage the company’s cash flow.
When using this particular scheme, you will make three-quarterly or nine-monthly interim VAT payments during the annum; however, this requires only one VAT return to be completed at the end of the financial year. You can use the annual accounting scheme if your predicted annual turnover is no more than £1 million.