If you are VAT registered you must charge VAT on the products or services you sell.

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1 An Introduction to VAT VAT (value added tax) is a tax levied on sales of goods and services. If you are VAT registered you must charge VAT on the products or services you sell. Upon submission of each VAT return the amount payable will usually be the difference between the VAT you have charged and that which you have incurred. When do you need to register for VAT? When you commence in business you are not automatically registered for VAT. Registration will only occur as a result of either: A voluntary desire A statutory obligation Statutory Obligation Once your business either reaches, or is expected to reach, the VAT threshold during any 12 month period ( 79,000 from April 2013), then you must register for VAT unless you meet either of the following conditions: You only sell goods or services that are exempt from VAT. You are not in business according to HMRC s definition for VAT purposes. In other words, if your turnover reaches the threshold (this usually increases annually), you MUST register for VAT if you are in business and selling products or services that are subject to VAT. If you do have to register, then you are obliged to charge VAT on your invoices. This in effect increases the cost of your services by the relevant VAT rate. It also means you can reclaim the VAT from any purchases you make for the business. Voluntary Desire In some cases businesses choose to register for VAT even if they operate below the threshold and therefore are not obligated to. Possible reasons for this would be: Having a VAT number may help give credibility to the smaller business, making it appear larger than it actually is. The business customers are also VAT registered and can reclaim any VAT you charging. This means that there is effectively no increase in prices. The VAT incurred on purchases is more than that which would need to be charged (this would result in a tax repayment to the business). The business is supplying goods or services that a classed as zero rated. This basically means that you will not have to charge VAT to your customers but you can still reclaim VAT on your purchases. 1

2 When considering whether or not to voluntarily register your business, careful consideration should be given to the impact on your customers. Whilst VAT registered customers will not be adversely affected, the effective result for your non-vat registered customers will be that they will have to pay more for your goods and services. This can negatively impact both your competiveness and your profits due to the potential pricing implications. What is the rate of VAT? There are three different rates of VAT: Standard rate 20% (from 4 January 2011 onwards) Reduced rate: 5 % Zero rate: 0% The vast majority of products and services are standard rated. Reduced rate applies to certain items such as: domestic fuel and power, installation of energy-saving materials, sanitary hygiene products and children's car seats. Zero-rate applies to specific items including: food (though there are many exceptions), books and newspapers, children's clothing and public transport. Certain things are exempt from VAT altogether. Examples include: insurance, education, fund-raising events by charities, membership subscriptions and most services provided by doctors and dentists. You can see a full list of VAT ratings of items and services here. This can be an extremely complicated and technical area VAT and mistakes can be extremely costly. If you would like to discuss this in more detail one of our on hand experts will be happy to help and initial consultations come with no obligation and are completely free of charge. What next? - Call us on or us for advice at Click here to request a callback >> 2

3 Calculating VAT You have to charge VAT on every sale you make. This is done by multiplying the cost of the product or service by the VAT rate percentage, then adding that to the cost of the item or service. For example: You sell a standard rated product for 100. Multiply 100 by 20% giving a VAT figure of 20. The total cost charged to the customer is = 120. VAT should be shown separately on all invoices/receipts and the relevant rate displayed clearly. You have to keep records of all VAT transactions. That is VAT you've charged on sales and VAT you've been charged on purchases. Accounting for VAT can seem a daunting task but our team are on hand to help and will help new customers by providing tools such as bespoke spreadsheets, completely free of charge, which can be used to record and calculate your VAT transactions for you. What next? - Call us on or us for advice at Click here to request a callback >> Paying VAT to HMRC HMRC require VAT registered businesses to submit a VAT return at regular intervals (usually every 3 months). The difference between the VAT you have charged (called output tax) and that which you have incurred (input tax) during the taxable period is the amount payable to HMRC. If input tax exceeds output tax for a period then HMRC will repay the difference to you. Your VAT payment and return must be made by the due date to avoid potential penalties. All VAT payments and returns must now be made online. Alternative VAT schemes Most VAT registered businesses will account for their VAT quarterly, as outlined above, with the excess of output vat over input vat being paid to HMRC upon submission of each return. There are, however, a number of alternative VAT schemes that businesses can apply to use. Each scheme comes with its own specific rules but are all generally designed to make VAT accounting easier for some small businesses. 3

4 The Annual Accounting Scheme If you use the Annual Accounting Scheme you only have to fill out one return annually, at the end of the year. You will pay VAT in nine instalments throughout the year at monthly intervals, or by three quarterly payments. You then make a balancing payment at the end of the year upon submission of the return. The major benefit of this is that it can reduce your paperwork and make cash-flow management easier. You can apply to use the scheme if your annual turnover is not expected to be more than 1.35m. Cash Accounting Scheme What is cash accounting? Cash accounting enables you to account for VAT on the basis of payments received and made instead of on tax invoices issued and received. The VAT payable or repayable for each accounting period will be the difference between the total amount of VAT included in payments received from your customers and the total amount of VAT included in payments made to your suppliers. Who can use the scheme? Cash accounting is open to you if you are a registered trader with an expected taxable turnover not exceeding 1,350,000 in the next twelve months. The main conditions are that you should have made all necessary VAT returns and have made arrangements with HM Revenue & Customs to clear any arrears of VAT payments. There is no need to apply to use the scheme, but you should start to use it at the beginning of a tax period. Will it be beneficial to me? This will depend on the period of time between you issuing sales invoices and receiving payment from your customers. The longer the time lag, the more of a benefit cash accounting is likely to be. If you are usually paid as soon as you make a sale (e.g. if you use a retail scheme) you will normally be worse off under cash accounting. The same applies to those who regularly receive repayments of VAT (e.g. because you make zero-rated supplies). The potential disadvantage arises because you will no longer be able to take credit for VAT when you receive a tax invoice; you will have to wait until you have actually made the appropriate payment. One major advantage of the scheme is that it simplifies your bookkeeping requirements, and many businesses can be controlled simply by using an appropriately analysed cash book. See our guide to basic bookkeeping for more information on this. 4

5 Another important advantage is that the burden of paying VAT on bad debts is removed. Under conventional VAT accounting you have to pay VAT whether you have been paid by your customer or not, and VAT bad debt relief is not available until the debt is at least six months old. Flat Rate VAT Scheme Depending upon the size and nature of your business, it may be preferable to register for the flat rate scheme (FRS). The basic mechanics of the scheme are that you charge VAT on sales in the usual way but calculate input tax as a percentage of your turnover (inclusive of VAT) The percentage you apply will depend upon the industry you are in. A bonus 1% is also applied in the first 12 months. Example: IT contractor using the flat rate scheme for the first time has VAT inclusive sales for the quarter of 30,000 ( 25,000 plus 5,000 20%) Relevant percentage for the IT industry is 14.5% VAT payable to HMRC for the quarter is calculated as 30,000 (VAT inclusive turnover) x 13.5% (14.5% - bonus 1% due to first year discount) = 4,050. As VAT charged was 5,000 and VAT payable is only 4,050, the remaining 950 is effectively profit for the period. The FRS is therefore extremely attractive to businesses incurring very little input VAT and as a result is the chosen scheme for most contractors, freelancers, and consultants. Application to use the flat rate scheme Before applying to use the flat rate scheme you must have a VAT number. If you have not already registered for VAT then this must be completed prior to any flat rate scheme application. If you estimate that your annual turnover excluding VAT will exceed 150,000 in your first year, you shouldn't join the scheme. Additional Points If your annual turnover exceeds 230,000 of VAT inclusive revenue in subsequent years you must come off the scheme. Although businesses on the flat rate scheme are unable to claim back any VAT on purchased goods 5

6 and expenses for their business; they can reclaim VAT on capital asset purchases over 2,000. For multiple items to qualify; the capital purchases must all be on the same receipt. For example, you could reclaim the VAT on a PC, printer and scanner totalling 2,000 so long as they were all purchased together and on the same receipt. If each of the items were purchased separately, however, then you could not claim back the VAT. Advantages of using the Flat Rate Scheme The ability to earn money from VAT, you can earn thousands of pounds extra each year simply out of VAT (the government allows this as the FRS is simple for them to manage and you are in affect acting as a tax collector). A reduced amount of paperwork to handle as you are not submitting any of your input costs to HMRC all you need to do is keep the receipts from your purchases. If you are a new business, using the flat rate scheme in your first year, you receive a further 1% decrease on the overall percentage tax you pay each quarter. Disadvantages of using the Flat Rate Scheme If you are buying lots of stock or have high VAT chargeable expenses you will miss out on reclaiming the VAT What next? - Call us on or us for advice at Click here to request a callback >> 6

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