Standard
scheme for VAT
Under the standard VAT scheme, you pay HMRC all the VAT
you invoice to a customer, less any UK VAT incurred on qualifying expenses.
VAT on expenses is called Input VAT. VAT on sales is
called Output VAT. Suppose you had one sale for £360 incl. £60 VAT and one
expense for £120 incl. £20 VAT, then your VAT return would be as follows:
Output VAT - £60
Input VAT - £20
VAT due to HMRC: £40
If it was the other way around and you had sales of £120
and expenses of £360, HMRC would refund you the VAT difference of £40
Cash basis or accruals basis
You can use the cash basis if your sales are under £1.35
million. This means your only pay VAT and reclaims the VAT on invoices that
have been paid or received. This means you won’t have to pay VAT on sales dated
in your VAT quarter when you have not received anything from the customer.
The accruals basis works on the invoice date, regardless
of when the expense or invoice was paid or received. Most clients will opt for
the cash basis so that they do not have the risk of a cash flow shortfall by
paying VAT on sales they have yet to receive.
Record Keeping
HMRC require that you keep records of all VAT invoiced
and incurred. HMRC can deny any claim for input VAT unless you have a VAT receipt. Please see the following link to
HMRC guidance on what can and can’t be reclaimed. We recommend that receipts
are attached electronically to your bookkeeping entries. For FreeAgent users,
you can quickly enter expenses and attach receipts using the mobile app.
Paying VAT to HMRC
For information on how to pay VAT to HMRC, please see our
article here.
We can help!
If Sherwin Currid does not manage your VAT Returns,
please get in touch with your account manager for further information on how we
can help you.
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