VAT: We've all heard of it, but do you know the basics?
The Basics
VAT stands for Value Added Tax and it is a tax levied on most goods and services provided for use within the UK and in certain overseas countries.
The standard rate of VAT is 20% which is charged by the seller to the customer at the point of sale. Any VAT collected by the seller must then be reported and paid to HMRC using a VAT return.
Some goods or services are exempt from VAT (like insurance), and others are deemed to be charged to VAT at a reduced rate, most often 0% (like certain pharmaceuticals and medical equipment) or 5% (like home energy).
Currently, if your businesses total VAT-able turnover within a 12-month rolling period surpasses £85,000, you are required to register for VAT. Once registered, you’re required to charge VAT on any relevant sales and can reclaim the VAT suffered on relevant business purchases. You report the VAT liability due on a VAT return to HMRC, using Making Tax Digital (MTD) compliant software. This is usually due each quarter but can also be done monthly (or annually under the annual account scheme (see below).
It is possible to get a VAT refund, whereby you are claiming back more VAT than you have declared on your sales. Note that the first time you have a VAT refund, it is likely to go through a review process with HMRC.
If your business is not VAT registered, you cannot charge VAT to customers and nor can you recover VAT on your costs.
Types of VAT scheme
There are a few types of VAT scheme to consider, with some key facts about each one:
Flat Rate Scheme:
The VAT liability is based on a fixed rate percentage (lower than 20%) of Gross turnover
The fixed rate percentage is based on your business sector
Your cannot recover VAT on purchases
Turnover must be less than £150k
Cash Accounting scheme
The "tax date" is based on when the money is paid or received, as oppose to the invoice date
You can only join if turnover is less than £1.35m
You must leave the scheme if turnover exceeds £1.6m
Annual Accounting scheme
You only file one VAT return per year
You make estimated VAT payments towards your VAT bill throughout the year
You can only join if your turnover is £1.35m or less
You must leave the scheme if turnover exceeds £1.6m
There are two other schemes to be aware of:
Retail scheme: These are designed to help simplify the VAT administration and there are a number of retail schemes available. It is especially useful for retailers who have a high volume of low-value sales, like shops and small businesses.
Margin scheme: These can be used by business owners who sell second-hand goods, works of art, antiques and other collectors items. It works by taxing the difference between the sales price and cost paid for an item.
Which scheme is best?
As with most things it life, it depends. Do not listen to "Dave down the pub", unless they are qualified in providing tax advice and can explain why their choice is best suited to your needs.
It's also worth noting that the right scheme for you can change over time. For example, when you first start trading, you might be better off with the Flat Rate scheme but as your costs start to increase, you might be better off switching to the cash accounting scheme.
Frequently Asked Questions:
Q. What is my VAT number?
A. Your VAT number is a unique code issued to a VAT registered business by HMRC. It is 9 digits long and usually references GB at the start. HMRC issue a VAT certificate when a business registers for VAT, which will show your VAT number and your VAT periods.
Q. I'm under the threshold, but should I register?
A. It depends. There's lots of pros and cons but ultimately, if your customers are VAT registered, hence could recover the VAT and you have plans to grow past the threshold in the future, it might make sense to voluntarily register now.
If however you mainly supply to non-VAT registered customers, hence cannot recover the VAT or your costs are not significant, it probably doesn't make sense to register now.
You need to give some thought to this and speak to a professional who can advise you further.
Q. The turnover in my last accounts was less than the threshold, I'm fine right?
A. Not necessarily. You need to monitor your turnover on a rolling 12-month basis, not just your last financial year.
Q. Can I claim back VAT on cars?
A. It depends. As a general rule; if your business is in the trade of; renting or selling cars, providing tax services or driving instructor, then you might be able to recover the VAT. If you're not in those businesses, and you've bought a car, you likely cannot recover the VAT if you own the car. If you lease the car, you might be able to recover 50% of the VAT on the monthly payments.
If you’re unsure on how VAT registration might impact your business, please get in touch and we’d be happy to help with any queries.
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