VAT guide should I register for VAT?

Transcription

1 VAT guide should I register for VAT? associates ltd

2 Should I register for VAT? This guide will give you an understanding as to whether you should register, what the various schemes are for small businesses and common answers to questions about what you can and cannot claim for. We do advise that you consult a qualified professional before you register for VAT. A good accountant will advise you if and when you need to be registered for VAT and will ensure you are on the right scheme.: Most purchases carry a VAT charge. Value Added Tax (VAT) is levied on most business transactions and on many goods and some services. There are three rates of VAT in the UK: 20% (the standard rate) 5% ( reduced rate) 0% ( zero rate) You will probably have to register for VAT if any of the following apply: The taxable turnover of your business in the previous 12 months reaches the VAT registration limi ( 73,000 from 1 April 2010), although you can also register on a voluntary basis if your turnover is below this. You believe your turnover in the next thirty days will exceed the registration limit. You take over a business as a going concern whose turnover meets the conditions of the previous two points. You buy goods from elsewhere in the EU to a value above the registration limit in one calendar year. There are penalties for failing to register on time. Goods and services liable to VAT are known as taxable supplies. Once registered you must charge VAT on all taxable supplies. VAT doesn t apply to everything. Supplies which are specifically not subject to VAT are referred to as exempt and include: insurance, financial services, postal services, health and education, although there are exceptions in every category. The amount of VAT payable to Revenue and Customs is the difference between your output tax on your sales and input tax on your purchases. If input tax is greater than output tax, a refund may be owed. The VAT due is normally payable each quarter following the submission of a VAT return, although under certain schemes the payments can be made monthly. If your taxable turnover is below 73,000 (from 1 April 2010) you don t have to register but you may be eligible to apply for voluntary registration. There can be advantages in registering such as: increased business credibility; potential savings if your supplies are zero rated but you can still reclaim VAT on your purchases; potential savings if you mainly supply other VAT registered businesses who don t mind being charged VAT and you can then still reclaim VAT on your purchases. This does however have to be weighed up against the hassle factor of completing VAT returns, and paying the VAT due every quarter. If you supply the general public you will probably not want to register as this simply puts your prices up by the rate of VAT. 2

3 VAT schemes There are various VAT schemes, mainly for small businesses: Annual accounting You can complete one VAT return per year rather that four if your turnover is under 1,350,000. You must also make nine payments on account throughout the year, and a balancing payment with the VAT return. Flat rate scheme This is for businesses with a turnover of under 150,000 and saves on administration as you just pay a set percentage of your VAT inclusive turnover based on your business sector rather than accounting for VAT on each individual in and out. It can also reduce the VAT you pay in some situations. Cash accounting If your taxable turnover is under 1,350,000 a year you can arrange to account for VAT on the basis of cash received and paid, rather than the invoice date or time of supply. Retail schemes These apply to retailers and offer an alternative if it s not practical to issue invoices for a large number of supplies direct to the public. What is VAT annual accounting? With the Annual Accounting Scheme you complete one VAT return per year instead of each quarter. The advantages of using the scheme are that... Only one VAT return is required per year and have two months in which to complete it. Cash flow is helped by regular monthly payments. You can choose the VAT return year that you want. It is usually necessary to make nine equal interim VAT payments by direct debit at monthly intervals during the year. The amount of the interim payments are based on an estimate of your total VAT liability based on your previous 12 months net payment of VAT. A balancing payment is made when the annual return is filed. You can also apply for quarterly payments that are 25% of the provisional VAT liability. You do have to be careful that not to build up a large unexpected balancing payment, so you need to monitor your total VAT liability over the year. The annual accounting scheme is also not good for any business with regular repayments of VAT as it then takes over a year to get your money. To qualify to use the scheme If your annual taxable turnover is not expected to exceed 1,350,000 you can join at any time after registering for VAT You do not belong to a VAT group, or are a registered as a division of a company. You can continue to use the scheme until your annual taxable turnover reaches 1,600,000. 3

4 What is VAT flat rate scheme? The VAT flat rate scheme is designed to make it simpler and quicker for small businesses to complete their VAT return. This is because VAT payable to HMRC is calculated as a particular percentage of the gross turnover of the business and not as the difference between VAT on individual sales and purchases. In particular there is no need to record the VAT incurred on most purchases and determine whether it is reclaimable or not, so there is less chance of error. The amount of VAT charged to customers remains the same whether using the flat rate scheme or not. However, some business will pay less VAT by using the scheme and some may pay more by using it as the percentages used are based on the average VAT payable by particular trade sectors. It is important to calculate the financial effect before applying to use the scheme. The Flat Rate Scheme Calculation These are the steps in the calculation... The output VAT for a VAT return is established by multiplying the VAT-inclusive turnover by a fixed percentage which is determined by the sector in which the business operates. This goes in Box 1 on the return. All turnover is included in the taxable supplies it has made, whether standard, reduced, zero rated or even exempt and it is the gross turnover. This figure goes into Box 6. Usually no VAT can be reclaimed on purchases but there are exceptions for any VAT on purchases before the business was registered and VAT and on a single capital asset that costs over 2000 inclusive of VAT can be reclaimed. The VAT on these goes in Box 4 as usual and the net amount of the purchase in Box 7. So if for example your gross turnover comes to 20,000 and the percentage for the sector is 10%, the VAT due is If what you purchased was a capital asset for 3833 including 500 of VAT, then the VAT payment due would be To qualify to join the scheme A business must have a taxable turnover, excluding VAT, of no more than 150,000 a year. The taxable turnover is the total value of supplies or sales made by the business that are liable to a VAT whether at standard, reduced or zero rates, but excluding any expected sales of capital assets. A business must not already use the second hand goods, the tour operators or retail schemes. The business must not be required to use the capital goods scheme for certain capital items. A business must not have been found guilty of a VAT offence in the past year or be associated with another business or registered as part of a VAT group in the past 2 years. A business must apply to join the flat rate VAT scheme and can leave whenever it chooses by informing HMRC in writing. The Business Sector Flat Rates Different business sectors must use their own flat rate. A business must choose its sector on the grounds that it most closely describes its main trading activities. If the trading mix changes, so say the majority of the turnover comes from supplying restaurant meals rather than alcoholic drinks the trade sector to be used will change from Pubs (6.5%) to Catering Services (12.5%). The change in sector should be made from the start of the VAT period that contains the anniversary of joining the scheme. It is advisable to set out in writing why you made the selection of trade sector. A lot of the rates changed following the VAT increase to 20% on 4th Jan

5 A Trap in the Flat Rate Scheme The flat rate must be applied to all business income, including interest received from business bank accounts, rents, and sales of assets where VAT was not reclaimed, such as cars or property. This means you effectively pay VAT on the gross receipts of sales on which you have not collected any VAT. If you are a sole-trader the flat rate should be applied to any letting income you receive in your sole name, as lettings are regarded as a business for VAT purposes. Lettings undertaken as a partnership, perhaps jointly with your spouse, are not counted as part of your sole-trader business income. When you sell a let property the flat rate should be applied to the total proceeds. You can withdraw from the flat rate scheme before you sell a high value item such as a property, but you have to stay out of the scheme for at least 12 months. What is VAT Cash accounting? Under the cash accounting scheme you account for VAT on the basis of payments you receive and make, rather than on invoices you issue and receive. The main benefit of this scheme is that you don t have to pay VAT on invoices you have issued until your customers pay you, although it also means you can t reclaim VAT on purchases until you pay your suppliers. You get automatic bad debt relief because, if no payment is received, no output tax is due. You can choose this scheme if you expect the value of your taxable supplies (excluding VAT) during the next year (beginning at the start of a tax period) will not exceed 1,350,000 and... you have sent in all the VAT returns due at the time you start to use the scheme; you have not been convicted of a VAT offence in the last year; you have not received a penalty for VAT evasion involving dishonest conduct in the last year you do not owe any VAT or you have made arrangements with Revenue and Customs to clear the total amount of your outstanding VAT payments (including surcharges and/or penalties); Your business can continue using the scheme until its annual taxable turnover reaches 1,600,000. You may use the cash accounting basis for a further six months to account for any VAT outstanding on supplies made and received while using the scheme, or you can account for all the outstanding VAT due in the period you cease to use the scheme. Any VAT still outstanding at the end of the six month period must be accounted for on the VAT return ending then. You don t need to apply to use this scheme, and you can change to it at the beginning of any tax period. If your business is already registered for VAT when you start, you must make sure you don t account for VAT twice on any supplies made or received previously. You cannot retrospectively apply the cash accounting scheme to your business. The cash accounting scheme can be used together with the annual accounting scheme, or flat rate scheme for small businesses. 5

6 What VAT can I claim on entertaining expenses? VAT cannot be recovered on business entertainment expenditure. This includes the gratuitous provision to customers or clients of hotel accommodation, food and drink or tickets to events. If a director or employee entertains a customer or client whilst away from the workplace location, the VAT on that part of the entertainment expenditure which relates to the director s or employee s own meal cost may be recoverable as subsistence rather than business entertainment. Subsistence expenditure can also include, for example, the cost of staying in a hotel when attending a client meeting. Input VAT under such circumstances would be deductible. The input tax on the subsistence of contract workers who are not employed by the company cannot be reclaimed. Conversely, where a business organises an event which is also attended by directors and employees acting as hosts, the whole of the VAT on the cost is irrecoverable. None of the cost may be attributed to staff subsistence. Staff entertaining such as staff parties, team building exercises, staff outings and similar events, qualifies for input VAT recovery. This can include the entertainment costs relating to directors, partners or sole proprietors of a business where they attend staff parties together with other employees but excludes entertainment expenditure where the event is organised solely for the business proprietors. What VAT can I claim on motor expenses? Car Leasing You are normally only permitted to reclaim 50% of the input tax for the cost of car leasing regardless of the price of the car. However this restriction does not apply if the vehicle is used as a taxi, for self-drive hire, or for driving instruction. Car Fuel With the exception of car fuel, you can claim back the VAT on all your motor expenses in full, if you have valid VAT invoices for those costs For car fuel used for private motoring, there are special rules. If you reclaim VAT on fuel that is used for private purposes, you must pay a VAT scale charge based on the CO2 emission band of the car. Previously this was based on the engine size of the car. This is a fixed charge that is not related to the amount of actual use. 1 of private petrol and you re caught. Scale charges are the most common omission from VAT returns and are one of the first things looked for on a VAT inspection and easy to identify when they are missing. You should do a calculation to identify if it is worth your while reclaiming the VAT on private fuel. If the amount of VAT you can reclaim on the fuel you buy is less than the amount of VAT to pay on the scale charge then you opt out of reclaiming the VAT on the fuel in order to avoid the scale charge. If the company car driver repays you in full for any private fuel used, then no scale charges are due. However, you should charge output VAT on the amount the driver pays to you. You can have some cars opt for scale charges and some not, but this would certainly complicate your VAT records. Car Parking You are able to reclaim the VAT on business car parking including that at the business premises. Mileage Allowance When you pay a fixed mileage rate to your employees for business travel such as the 40p per mile, this rate is intended to cover various elements such as fuel, repairs, insurance, depreciation, etc. However you are allowed to reclaim the VAT on the fuel element, which many businesses forget to do. To help you identify the fuel element the VAT man has published advisory fuel only mileage rates for company cars. They are advisory rates, not compulsory but are a good starting point. To reclaim the VAT, simply multiply the fuel only rate by by 20 and divide by 120 (from 4 Jan 2011). Before 4 Jan 2011 multiply by 17.5 and divide by If you have not reclaimed this VAT in the past, you can go back 3 years and reclaim the VAT now. 6