Value Added Tax (VAT)

If you need to be registered for Value Added Tax (VAT), here at Kennedys Accounting we are here to help. By ensuring you are on the correct VAT scheme and assisting with providing the correct software to ensure your returns can be filed correctly you will be off to a good start! You can also use our bookkeeping service to ensure your accounts are in order to submit.

There are a number of VAT Accounting Schemes to chose from and it is important that you get the right advice with regards to the ‘right scheme for you’. Here at Kennedys Accounting, we are experienced with regards to VAT so please just ask if you need more information.

What is VAT and when should you register?

VAT is a sales tax that is charged on most goods and services. There are exemptions and this is one of the reasons it is important to chat to us – you don’t want to register unnecessarily, or on the flip side find yourself in a position where you should have and haven’t!

When you are VAT registered you are effectively a ‘tax-collector’, as your sales price will be both the ‘sale price’ and the VAT charged added together. When you become VAT registered it is important that you discuss this with your accountant. As this is likely to mean that you have increased your price and you need to be sure that you are still achieving the margin – don’t forget the VAT you are adding on will need to be paid to HMRC.

So when can you / should you register for VAT?

When your turnover reaches the VAT threshold, or if you expect it to, you must register for VAT.

Many businesses decide to voluntarily register for VAT, often as soon as the business is incorporated. There are a number of reasons that this choice may be made, it could be that the turnover is expected to reach the threshold very quickly, or that they only expect to work business to business and therefore all of their customers will also be VAT registered, so it won’t affect margins, or it could be ‘status’.

Whatever reason you are registering for VAT, please discuss with the team here at Kennedys Accounting who will be pleased to discuss and advise.

How does a VAT return work?

Once your business is VAT registered for most schemes you’ll need to submit returns, usually quarterly, to HMRC which show how much VAT you have charged. The return will also show how much VAT you have paid to your suppliers each time you make a purchase.

However, if you charge more VAT to customers than you pay to suppliers, you’ll need to pay the difference to HMRC as your VAT bill. If you pay more VAT on sales than you collect from your customers, you will be able to reclaim the difference from HMRC.

HMRC have very strict deadlines with regards to VAT returns and you always need to ensure that returns are completed on time and payments made to avoid penalties / fines.

What are the various VAT accounting schemes?

The way VAT works can depend on which VAT scheme you are registered for. There are different rules for some schemes, such as eligibility and reporting requirements. We have put some details below, but please contact the team here at Kennedys Accounting for advice, you don’t want to find yourself on the wrong scheme….

So What VAT scheme should you use?

Being on the right VAT scheme can make your VAT accounting much simpler, and help you improve cash flow in your business. The scheme you select will depend on how your business operates, and its important you ensure you are on the right scheme.

Let’s look at some of the schemes available?

Standard VAT accounting

This is the most common VAT scheme. This works by keeping a record of the VAT on all your purchases and sales.

The advantage of standard accounting is that you can claim back VAT on purchases on the basis of the date on the invoice. However, this also works the other way, which means that you’ll need to pay HMRC the VAT on all your sales invoices, even if the customer hasn’t paid you. This needs to be managed closely, as it could have implications on cash flow.

Cash Accounting Scheme

VAT returns are based on the ‘tax point’ date, which is the VAT invoice date, for your sales and purchases. The thing to consider with this scheme is that it can mean you need to pay VAT to HMRC on a sale when your customer hasn’t even paid you yet.

VAT Cash Accounting is based on the payment date, not the invoice date. This effectively means that you have to pay the VAT to HMRC once your clients pay their bill. It also works the other way round, you’ll only be able to reclaim VAT on a purchase once you pay your supplier.

The threshold for this scheme, means you can sign-up for VAT cash accounting if you estimate your taxable turnover will be £1.35 million or less, and only remain in the scheme if it stays below £1.6 million.

VAT Flat Rate Scheme

This scheme aims to make VAT accounting much easier, rather than working out the VAT on all your purchases and sales, you’ll work out the VAT you owe to HMRC as a percentage of your annual turnover.

This scheme is popular with small businesses, it’s easy to do and there’s less paperwork. The actual ‘flat rate’ that you use to calculate the VAT depends on your industry. Our team here at Kennedys Accounting can advise and guide you on this.

As you pay the VAT to HMRC as a flat rate, you keep the difference if you collect more VAT from customers than you need to pay. However when you are operating VAT on the Flat Rate Scheme, you are not eligible to reclaim the VAT that you pay on purchases, apart from some exceptions for capital assets worth more than £2,000.

The Flat Rate Scheme is only available if your business turnover is less than £150,000 (excluding VAT). There is also a 1% discount on the flat rate VAT if you use the scheme during your first year of being VAT registered.

Limited cost trader - Some businesses that use the Flat Rate Scheme have to use a special rate – 16.5%. Known as limited cost traders, these businesses only buy a few goods, and the amount they spend on relevant goods is:

Either less than 2% of your VAT flat rate turnover
Or more than 2%, but less than £1,000 per year.

There are some restrictions on the goods and services that can be included in this calculation, for example, some business expenses, such as professional services, capital expenditure, and vehicle running costs…

Annual Accounting Scheme

This scheme means that you pay VAT across over the year either in monthly or quarterly instalments, and then submit an annual VAT return. If you’ve overpaid, you’ll be able to request a refund.

This scheme is not used very much, although some businesses say they find this a simple easy way to work, the downside is that you’ll only be able to reclaim any VAT on an annual basis.

VAT retail schemes

VAT retail schemes can simplify VAT although there are a number of them to choose from. The right scheme for your business will depend on your retail turnover (excluding VAT).

For instance, on one of the schemes you can only use the Point-of-Sale Scheme if you identify and record VAT at the point that you make a sale.

In some cases, you can combine the retail scheme with the Cash Accounting Scheme or the Annual Accounting Scheme.

VAT margin schemes

VAT margin schemes can be used by businesses who sell second-hand goods, such as works of art or antiques. The scheme is designed to tax the difference between what a business has paid for an item and how much it sold it for (instead of taxing the full selling price).

For a VAT margin scheme, business owners have to keep a record of goods to be reported on their VAT return. The records should include invoices for each and every item.

This is a broad overview for VAT and there are literally ‘loads’ of rules depending on turnover, what you do, what you sell – is the food hot or cold for instance, that the best thing to do is to chat to our team here at Kennedys Accounting to make sure you are on the right scheme. In some cases you can change VAT schemes as well.

We look forward to talking to you and advising you on your business VAT requirements.