VAT. A tax that fills many people with an awful feeling of dread! But if you’re self-employed or run a limited company or partnership it’s something you should really have more than a passing knowledge about. After all, you need to know whether your business should register for VAT, what you need to do if you are VAT-registered and how you should submit your returns and how often that needs to be done.
This month we look at all things VAT related to help debunk the myth that VAT is scary, although, if you really don’t want to know the ins and outs of VAT, we offer comprehensive VAT services, so you don’t have to!
What is VAT?
Value Added Tax, more often known as VAT is a business tax added to most products and services. Businesses registered for VAT must charge VAT on items they sell and then pay the VAT charged to HMRC.
There are 3 VAT rates:
- Standard rate of 20%: applied to most goods and services
- Reduced rate of 5%: applied to goods and services, such as mobility aids, children’s car seats, sporting activities for children under 17
- Zero rate of 0%: includes most food, books, newspapers, medicines, and children’s clothes.
Who has to register for VAT?
If your business has a turnover of over £85,000 than you must register for VAT. You will also have to register if you know your turnover will pass the £85,000 threshold in the next 30 days.
If your turnover is less than £85,000, you can choose whether to register or not. You also won’t need to register if your business falls into one of the exempt categories. These include:
- Education and training
- Health services
- Insurance, financial services, and investment
- Charity donations and events.
If you are unsure whether to register or not, please check with us! There is a big fine for companies who fail to register, and these penalties only increase over time.
What are the different VAT schemes?
There are several different VAT schemes available and which one you join will depend on the nature of your business, your annual sales, and the types of business purchase you make.
Flat Rate Scheme: If your annual revenue is up to £150,000, you can opt for the flat rate scheme. This means you will pay a percentage of your turnover to HMRC. The amount you pay will depend on your type of business. HMRC publish a full list on their website.
With the Flat Rate Scheme, you won’t be able to claim VAT back on any business purchases.
Standard Rate Scheme: This is the most popular option as it’s suitable for most types of business. Under it you charge VAT on all your eligible goods and services and claim back VAT on any business expenses.
Annual Accounting Scheme: some businesses can opt to submit a VAT return just once a year but make payments in advance throughout the year. At the end of the period, you will either receive a refund from HMRC or pay what you still owe. This scheme is only for businesses with a turnover of less than £1.35 million.
Cash Accounting Scheme: with this scheme you pay VAT to HMRC when your customer pays you rather than when you invoice them. This means you will have to pay money to HMRC even if you haven’t been paid.
There are also specific VAT schemes for retail businesses, which can make calculating VAT simpler. You can read more about them on the HMRC website, or we’ll be happy to talk to you about the various different options.
How do you register for VAT?
Registering for VAT is free and easy to do so is something you can do yourself. Simply go to the HMRC website, make sure you have all the information you need and then follow the instructions.
If you would like any support with this, just let us know.
What happens once you register for VAT?
Once you’ve registered for VAT you will need to:
- Add VAT to all your prices
- Display your VAT number on all invoices, documents and your website
- Submit VAT returns and pay any VAT to HMRC
- Keep digital records which includes:
- VAT sales invoices
- Receipts for all purchases
- A separate summary of VAT
You must keep these records for at least six years.
How often will I need to file a VAT return?
VAT returns need to be submitted every three months. Usually, they must be completed and submitted within one month and 7 days of the end of the relevant period. This means a VAT return for the 3 months to 30 June 2024 must be submitted by 7 August 2024. The VAT payment must also be made by 7 August 2024.
When you register for VAT, you will automatically be signed up to Making Tax Digital (MTD) for VAT. MTD is a government initiative to improve tax administration and means you will need MTD-compliant software to keep digital records and submit your returns. HMRC provide a useful list of compatible software packages, but give us a call if you would like to talk through what software you need.
Is it worth registering for VAT, if you don’t have to?
Obviously, if you register for VAT, you will also need to adjust your prices accordingly, which can be a bit of a shock to loyal customers! But on the plus side, you can claim back any VAT you have paid on any business expenses, and it can help create a more trustworthy image for your customers. In fact, some companies will only deal with VAT-registered businesses so that’s worth factoring into your decision.
Hopefully, this has debunked the myth that VAT is scary, but if you do have any questions, just let us know. We will be happy to talk through the different schemes, how to manage your VAT returns and the pros and cons of voluntarily registering. Or like we said earlier, we can also manage the whole process for you so you just don’t have to worry.
