VAT Initiatives That Work: Special Schemes for Small Businesses

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1 VAT Initiatives That Work: Special Schemes for Small Businesses

2 Flat rate VAT accounting, cash accounting and annual accounting are schemes available to small businesses that can reduce VAT bills or lessen the impact of VAT on a business s cash flow. The flat rate scheme This scheme can save VAT and reduce compliance costs and is available to any VAT registered businesses with expected turnover under 150,000 pa. Under the scheme VAT is not recovered on day to day business costs; instead, VAT is paid at a lower rate than the current 20% standard rate. The difference between that lower rate and the VAT which is charged is retained by the business. The amount retained is intended to compensate the business for the VAT not claimed on business costs. Businesses are still able to recover VAT on certain capital items of value in excess of 2,000 and in certain circumstances, on the cost of assets acquired up to four years before VAT registration. Example: The flat rate applicable to business consultants is currently 12%. If turnover is 100,000 plus VAT then 12% of VAT inclusive turnover means 14,400 is due to HMRC. The business retains the remaining 5,600 VAT charged. Cash accounting Cash accounting enables businesses to account for and pay VAT on the basis of cash received and paid rather than on the basis of invoices issued and received. It is available to businesses with an expected turnover below 1,350,000. The advantage of the scheme is that VAT on sales is not due until the business receives payment, meaning VAT will never have to be paid in respect of bad debts. The drawback is that no VAT due on purchases can be recovered until suppliers invoices are settled. The scheme therefore benefits businesses with customers who are slow to pay, but will not benefit cash businesses or those regularly in a VAT repayment position. Annual accounting The annual accounting scheme helps small businesses by allowing them to submit only one VAT return annually, rather than the normal four. It is available to businesses with expected turnover below 1,350,000. Under the scheme VAT instalments must be paid during the year, and these are based on an estimated liability for the year, with a balancing payment due with the return. The scheme is intended to help with budgeting and cash flow and also reduce paperwork. Businesses that have been VAT registered for 12 months or more will pay VAT in nine monthly instalments of 10% of the previous year s liability. Instalments are payable at the end of months 4-12 of the annual accounting period.

3 Retail Sales of clothing and footwear The UK has a VAT relief for articles of clothing or footwear designed for young children. HMRC provides a schedule of maximum sizes, and clothes within this size range that can be sold at the zero rate of VAT provided they are held out for sale (advertised) for children, normally in a separate children s area. In practice, the sizes are relatively generous and will encompass many clothes and shoes suitable for adults. This means that the zero rate of VAT can apply to far more clothes and shoes than would traditionally be displayed in a children s wear area of a department store. The relief can also be extended to include online sales, provided that the correct information appears somewhere on screen, it is possible to treat online sales as subject to the zero rate of VAT based on size alone. VAT groups Larger businesses which undertake their activities in a number of different corporate bodies may choose to group these businesses together under a single VAT registration a scheme known as VAT grouping. VAT grouping not only saves on administration but can also result in lower VAT payments for the grouped companies overall. The main advantage is that charges between group members are ignored for VAT purposes, meaning there is no requirement to add VAT on intergroup management charges and other recharged costs. This would include charges for assets owned by one group company and used by others. Where a VAT group member makes sales that are VAT exempt it may not be entitled to recover VAT charged by associated entities and third parties if it was not included in a VAT group. Holding companies may incur significant VAT-bearing expenditure, but they will often not be entitled to become VAT registered in their own right, resulting in VAT on costs not being recovered. By including a holding company in a VAT group with trading subsidiaries, the VAT incurred by the holding company can be reclaimed by the group. Introducing or extending a VAT group to new members at an early stage of a restructuring exercise will often prevent new companies from incurring significant irrecoverable VAT costs. Although VAT grouping has a number of obvious advantages it is not without pitfalls. For example: Single VAT return There is only one VAT return to complete and costs incurred by the various group members do not have to be differentiated for VAT purposes. However, it is likely that sales and purchases will still have to be processed in each group member s separate accounts for management accounting purposes. It may also be a significant administrative burden to collect and process the sales and purchase records of all companies in a VAT group in order to submit the amalgamated VAT return on time. Furthermore, penalties for late returns are calculated as a percentage of the VAT paid late by the group as a whole, and each VAT group member is jointly and severally liable for the VAT debts of the group. This means that if one company defaults, the whole group can be penalised and the penalty may be higher as a consequence of VAT grouping.

4 Partial exemption As noted above, should any group member make VAT exempt supplies it will not normally be able to recover all of the VAT on associated costs. However, VAT partial exemption calculations consider the turnover from taxable and exempt supplies for the whole group, not just the member making VAT exempt supplies. This may mean that all the group s input VAT can be recovered because costs in respect of VAT exempt activities are small relative to the total costs incurred by the group. However, where a group company has turnover from VAT exempt supplies which are high relative to the group s turnover, this may cause the whole group to suffer a reduction in input tax recoveries. Had they not been in the group, the other group members would have been entitled to full deduction of VAT on costs. Therefore, careful consideration should be given when deciding whether to include companies with high levels of VAT exempt income and associated costs in a VAT group. Payments on account Once a business s VAT payments exceed 2.3m per year it is required to make monthly VAT payments on account. This limit applies to groups irrespective of how many members there are. Grouping can therefore lead to VAT registered companies having to make payments on account, where they would not have had this requirement individually. Property Transfer of Business as a Going Concern No VAT is due on the Transfer of a Business as a Going Concern (TOGC), provided certain conditions are met. This creates savings for business buyers who are seeking to raise finance to pay VAT at the standard rate on the business purchase price. It will also save on Stamp Duty Land Tax (SDLT) whenever a dutiable transfer of property is included as part of a business sale. Where a TOGC is not applicable, SDLT is calculated on top of the VAT-inclusive sale price of the property. In cases where a vacant commercial property is being purchased and VAT is to be charged by the vendor, it s often worth creating a TOGC in order to avoid paying VAT and increased SDLT. This can often be achieved by introducing a lease which is then transferred as part of the sale or by appointing a nominee to acquire the property and rent it to the buyer. These steps are worth considering if, for example, a pension fund is being used to buy property or if a tenant plans to buy a building it currently occupies. How we can help Whether you are looking to set up a VAT grouping scheme, cash or annual accounting scheme, our VAT team are on hand to provide expert advice on all VAT related matters.

5 How do I find out more? Our advice helps clients to benefit from a range of potential VAT savings. If you would like an assessment of whether these ideas could benefit your business, please contact one of our tax experts below: Fiona Masson Aberdeen fiona.masson@jcca.co.uk David Urquhart Aberdeen david.urquhart@jcca.co.uk Alan Main Edinburgh alan.main@jcca.co.uk Graham Seager Edinburgh graham.seager@jcca.co.uk Paul Cochrane Glasgow paul.cochrane@jcca.co.uk

6 Aberdeen Edinburgh Elgin Forfar Fraserburgh Glasgow Huntly Inverness Inverurie Perth Stirling jcca.co.uk Disclaimer: This update has been published for information purposes only. The contents of this document are not a substitute for tax, legal or professional advice. The law may have changed since this document was first published and Disclaimer: whilst all possible While care all possible has been care taken is taken in the in completion the completion of this of document, this document, readers no should responsibility seek tax advice for loss based occasioned upon by any their person own particular acting or circumstances. refraining from action as a result of the information contained herein can be accepted by this firm. Johnston Carmichael is a member firm of the PKF International Limited network of legally independent firms and does not accept any responsibility or liability for the actions or inactions on the part of any other individual member or correspondent firm or firms.