To register or not to register VAT is the question!

If your business turnover is not over the current registration threshold of £73,000,you may be thinking, “well I don’t HAVE to, so I won’t”. However there are many reasons why voluntary registration may be something to consider.

Some people perceive VAT registered businesses to be larger and more established than those that are not registered. Whether this is true or not, this can lead to businesses only agreeing to work with other VAT registered business, meaning that you may miss out on some valuable work.

Equally, if the majority of your customers are not VAT registered (Individuals or small non-registered businesses) then becoming registered would mean an increase in your prices by the current standard VAT rate of 20%. For this reason, if you are forecasting to go over the threshold in the future, it may be better to register now to avoid the appearance that you have increased your prices.

By registering for VAT, you will have the added benefit of being able to reclaim any VAT on your business purchases, which could result in a repayment of VAT.

If you have not yet started to trade, but you intend to make taxable supplies in the future, you can voluntarily register for VAT in order to reclaim the VAT paid on your start-up costs.

One of the biggest reasons for voluntary registration is to save money!!

Flat rate VAT Scheme

The flat rate VAT scheme is for small businesses with an annual turnover not exceeding £150,000. The scheme was introduced to reduce the administrative burden imposed when operating VAT.

Under the scheme a set percentage is applied to the turnover of the business as a one-off calculation instead of having to identify and record the VAT on each sale and purchase you make.

To join the scheme you can apply by post, email or phone and if you are not already registered for VAT you must submit a form VAT1 at the same time.

You may not operate the scheme until you have received notification that your application has been accepted and HMRC will inform you of the date of commencement.

In addition the scheme cannot be used if, within the previous 12 months, you have:

  • ceased to operate the flat rate scheme
  • been convicted of an offence connected with VAT
  • been assessed with a penalty for conduct involving dishonesty
  • used the second hand margin scheme or auctioneers scheme
  • used the tour operators margin scheme
  • If you have a requirement to operate the capital goods scheme for certain items
  • The scheme will clearly be inappropriate if you regularly receive VAT repayments.

How the Scheme Operates

VAT due is calculated by applying a predetermined flat rate percentage to the business turnover of the VAT period. This will include any exempt supplies and it will therefore not generally be beneficial to join the scheme where there are significant exempt supplies.

The percentage rates are determined according to the trade sector of your business and range from 4% to 14.5%. The table below summarises the percentages. In addition there is a further 1% reduction off the normal rates for businesses in their first year of VAT registration.

If your business falls into more than one sector it is the main business activity as measured by turnover which counts. This can be advantageous if you have a large percentage rate secondary activity and a modest major percentage trade. You should review the position on each anniversary and if the main business activity changes or you expect it to change during the following year you should use the appropriate rate for that sector.

Although you pay VAT at the flat rate percentage under the scheme you will still be required to prepare invoices to VAT registered customers showing the normal rate of VAT. This is so that they can reclaim input VAT at the appropriate rate.

Example of the Calculation

Cook & Co is a partnership operating a café and renting out a flat. Its results are as follows:

VAT inclusive turnover: £
Standard rated catering supplies 70,000
Zero rated takeaway foods 5,500
Exempt flat rentals 3,500

£79,000
Flat rate 11% x £79,000 = £8,690
Normally £70,000 x 17.5/117.5 = £10,426 less input tax

Treatment of Capital Assets

The purchase of capital assets costing more than £2,000 (including VAT) may be dealt with outside the scheme. You can claim input VAT on such items on your VAT return in the normal way. Where the input VAT is reclaimed you must account for VAT on a subsequent sale of the asset at the normal rate instead of the flat rate.

Transactions Within the European Community

Income from these sales is included in your turnover figure.

Where there are acquisitions from EC member states you will still be required to record the VAT on your VAT return in the normal way even though you will not be able to reclaim the input VAT unless it is a capital item as outlined above.

The rules on services are complex. Please get in touch if this is an issue so that we can give you specific advice.

Records to Keep

Under the scheme you must keep a record of your flat rate calculation showing:

  • your flat rate turnover
  • the flat rate percentage you have used
  • the tax calculated as due.

You must still keep a VAT account although if the only VAT to be accounted for is that calculated under the scheme there will only be one entry for each period.

Cash Accounting

Cash accounting enables a business to account for and pay VAT on the basis of cash received and paid rather than on the basis of invoices issued and received.

Advantages and Disadvantages of the Scheme

The advantages of the scheme are as follows.

  • Output tax is not due until the business receives payment of its sales invoices. If customers pay promptly, the advantage will be limited. Even so, the gain may be material
  • There is automatic bad debt relief because, if no payment is received, no output tax is due
  • Most businesses find it easier to think in terms of cash flows in and out of their business than invoiced amounts.

The potential disadvantages are as follows.

  • There is no input tax recovery until payment of suppliers’ invoices
  • The scheme will not be beneficial for net repayment businesses – for example, a business just starting up, which has substantial initial expenditure on equipment, stocks etc so that input tax exceeds the output tax, should delay starting to use the scheme. That way, it recovers the initial input tax on the basis of input invoices as opposed to payments.

Key Rules

From 1 April 2007 a business can join the scheme if it has reasonable grounds for believing that taxable turnover in the next 12 months will not exceed £1,350,000 provided that it:

  • is up to date with VAT returns
  • has paid over all VAT due or agreed a basis for settling any outstanding amount in instalments
  • has not in the previous year been convicted of any VAT offences.

All standard and zero-rated supplies count towards the £1,350,000 except anticipated sales of capital assets previously used within the business. Exempt supplies are excluded.

When a business joins the scheme, it must be careful not to account again for VAT on any amounts already dealt with previously on the basis of invoices issued and received.

A business can start using the scheme without informing HMRC. It does not cover:

  • goods bought or sold under lease or hire-purchase agreements
  • goods bought or sold under credit sale or conditional sale agreements
  • supplies invoiced where full payment is not due within six months
  • supplies invoiced in advance of delivering the goods or performing the services.

Once annual turnover reaches £1,600,000 the business must leave the scheme immediately.

On leaving the scheme, VAT is due on all supplies on which it has not already been accounted for. However outstanding VAT can be accounted for on a cash basis for a further six months after leaving the scheme.

Accounting for VAT

Output tax must be accounted for when payment is received.

Cheque – Treated as received on the date the cheque is received or if later the date on the cheque. If the cheque is not honoured an adjustment can be made.

Credit/debit card – Treated as received/paid on the date of the sales voucher.

Standing order/direct debits – Treated as received/paid on the day the bank account is credited.

Part payments – VAT must be accounted for on all receipts/payments even where they are part payments. Part payments are allocated to invoices in date order (earliest first) and any part payment of an invoice allocated to VAT by making a fair and reasonable apportionment.

Records

Under the cash accounting scheme the prime record will be a cash book summarising all payments made and received with a separate column for VAT. The payments need to be clearly cross-referenced to the appropriate purchase/sales invoice.

In addition the normal requirements regarding copies of VAT invoices and evidence of input tax apply.

Annual Accounting

What is the Annual Accounting Scheme?

The annual accounting scheme helps small businesses by allowing them to submit only one VAT return annually rather than the normal four. During the year they pay instalments based on an estimated liability for the year with a balancing payment due with the return. The scheme is intended to help with budgeting and cash flow and reduce paperwork.

Joining the Scheme

A business can apply to join the scheme if it expects taxable supplies in the next 12 months will not exceed £1,350,000.
Businesses must be up to date with their VAT returns and cannot register as a group of companies.

Application to join the scheme must be made on form 600(AA) which can be found at the back of VAT Notice 732. HMRC will advise the business in writing if the application is accepted.

Paying the VAT

Businesses that have been registered for 12 months or more will pay their VAT in nine monthly instalments of 10% of the previous year’s liability. The instalments are payable at the end of months 4-12 of the current annual accounting period.

Alternatively such businesses may choose to pay their VAT in three quarterly instalments of 25% of the previous year’s liability falling due at the end of months 4, 7 and 10.

The balance of VAT for the year is then due together with the VAT return two months after the end of the annual accounting period.
Businesses that have not been registered for at least 12 months may still join the scheme but each instalment – whether monthly or quarterly – is based on an estimate of the VAT liability.

In all cases HMRC will advise the amount of the instalments to be paid.

The annual accounting period will usually begin at the start of the quarter in which the application is made. If the application is made late in a quarter it may begin at the start of the next quarter.

All businesses are able to apply to HMRC to change the level of the instalments if business has increased or decreased significantly.

Leaving the Annual Accounting Scheme

Any business can leave the scheme voluntarily at any time by writing to HMRC.

A business can no longer be in the scheme once its annual taxable turnover exceeds £1,600,000.

Advantages of the Annual Accounting Scheme

Because the liability to be paid each month is known and certain, cash flow can be managed more easily.

There is an extra month to complete the VAT return and pay any outstanding tax.

It should help to simplify calculations where the business uses a retail scheme or is partially exempt.

Potential Disadvantages of the Annual Accounting Scheme

Interim payments may be higher than needed because they are based on the previous year. However, they can be adjusted if the difference is significant.
A business is obliged to notify HMRC if the VAT liability is likely to be significantly higher or lower than in the previous year.

If this article has been useful and you would like to speak with one of our accountants to discuss your businesses VAT requirements, then please contact us.

Interested ?

Send us a few details and one of our team will be in touch to see how we can save you tax