What
is VAT?
VAT stands for “Value Added Tax”. It is a tax that
VAT-registered businesses charge when they supply their goods and services in
the UK, but there are some exceptions.
VAT does not apply to certain services because the law
says these are “exempt” from VAT and include loans, bank charges, and insurance
policies. Some are 0% rated, meaning that although they are taxable, the tax is
0. Examples include children’s clothes.
There are three rates of VAT in the UK:
1) 20% (standard rate)
2) 5% (reduced rate)
3) 0% (zero rate)
Will I have to register for VAT?
If your taxable supplies (sales) are over £90,000, you
must register for VAT, which we cover in our article here. Sales exempt from VAT do not form part of your
taxable turnover. This means that even if you make more than £90,000 in sales,
you may not need to register for VAT. Supplies of services to customers outside the UK are deemed to be outside the scope of UK VAT and do not count towards your turnover for VAT registration purposes.
The £90k threshold is calculated on a continual 12-month
rolling basis and not just in the 12-month trading period that forms the base
of the business accounts. You should register within 30 days of the end of the
month in which the threshold was crossed.
You can opt to register for VAT if your taxable turnover
is less than this, if what you do counts as a business for VAT purposes.
Turnover is classified as the money going through the company, not just the
profit. HMRC have a useful tool that you can use to see what registering for VAT may mean for your business which you can see here.
Why would I want to register for VAT if I don’t have to?
You can reclaim the VAT you pay your suppliers,
effectively getting a refund from HMRC. If your customers are VAT registered,
then they will not be put off by you adding VAT, as they will reclaim this in
their VAT return. However, if your customers are not VAT registered, they
cannot recover the VAT, and you may want to avoid increasing their costs by
voluntary registration. If your customers are all based abroad, and you are
providing services, then you will not need to charge VAT to them but can still
claim VAT on your expenses. HMRC will send you a refund each quarter.
You can also claim VAT on services (such as accountancy
fees) for up to six months and assets that you still own that were purchased in
the last four years before your first return registration.
The VAT flat rate scheme (FRS)
HMRC introduced the Flat Rate Scheme to simplify VAT
for small businesses. This allows you to pay VAT as a percentage of your
turnover instead of having to work out the VAT on all your sales and purchases.
You can apply to join the scheme if you expect that in the next 12 months, your
taxable turnover (excluding VAT) will not be more than £150,000.
The main disadvantage of the flat rate scheme is that,
apart from your first return for historic expenses before registration, you
cannot claim VAT on expenses unless you purchase a capital item that costs at
least £2,000 (VAT inclusive). So if most of your company expenses do not have VAT,
this may not be a problem.
For more information on the flat rate scheme, please see
our article here.
However, you will be better off using the standard rate
scheme in most cases. We can assist you with preparing the VAT returns.
Usually, the extra cost of doing this is more than covered by the saving from
being on the standard scheme.
Registration
If you require us to register your company for VAT,
please get in touch with your account manager to discuss your suitability, and
we will send you an e-form to complete. VAT registration takes around three
weeks but can be longer if HMRC has questions about the application.
Once the Company is VAT registered, you must show the
registration number on your invoice and add VAT at the appropriate rate. There
are penalties for late submission of returns and late payment. VAT is usually
done quarterly and will tie in with your year-end. So your first period may be
one or two months, but it will be every three months. The deadline for
submitting the return and paying any VAT is a month and seven days after the
period end. So if your quarter ended 31 December, you must submit and pay any
VAT by 7 February.