VAT

Value added tax is charged on the supply of most goods and services in the course of business by registered taxable persons and, in principle, payment is made to HMRC every three months of the excess of VAT on sales invoices over VAT on purchase invoices.

Once your business turnover reaches a certain level, you will have to register for VAT (even if your turnover is below the registration threshold you could consider registering voluntarily for VAT). This means that whenever you buy or sell anything in the course of your business, you will have to charge VAT on your sales, keep proper VAT records on your incoming and outgoing transactions and pay VAT to HM Revenue & Customs (HMRC).

A business will pay VAT on its purchases, which is called input tax, and charge VAT on its sales, which is called output tax.

If a VAT-registered business charges more output tax on sales than it pays in input tax on purchases, it must pay the difference to HM Revenue & Customs (HMRC). If more input tax has been paid than output tax charged, HMRC will refund the difference.

You must register your business for VAT if you supplied taxable goods and services with a total value of more than £67,000 in the last 12-month period, or if you anticipate that your supply of taxable goods and services will exceed the £67,000 threshold in the next 30-days.

If your businesses has a turnover below the registration threshold can register voluntarily.

Advantages

• Ability to reclaim some of your input tax
• Increased credibility for your business - some businesses prefer dealing with suppliers that are VAT-registered.
• If you supply other VAT-registered businesses then they can reclaim the VAT charged.

Disadvantages

• You will need to start keeping VAT records and fill in a regular VAT return with details of your sales and purchases.
• If you supply the public or non-VAT registered businesses then they cannot reclaim the VAT charged.

There are three rates of VAT:

• Standard rate, 17.5 per cent
• Reduced rate, 5 per cent
• Zero rate, 0 per cent

Certain goods and services are classed as exempt and no VAT is charged to the customer. To find out when your goods and services are subject to or exempt from VAT visit the HMRC web site.

The VAT flat rate scheme (FRS) was introduced with the aim of simplifying the way small businesses account for VAT so that they spend less time and money keeping conventional VAT records. The scheme is open to companies with an annual turnover (excluding VAT) of £150,000 or less, but you cannot use it unless you have agreed your FRS registration with HMRC.

Under FRS you add standard-rate VAT in the normal way to your sales invoices, i.e. the fees and expenses you invoice to your clients, but when accounting to HMRC each quarter you apply a fixed percentage to the gross turnover (total sales plus VAT) to arrive at the amount of VAT payable to HMRC.

For example:

If your agreed flat rate is 12.5%, and you bill a client fees of £10,000 plus £1,750 VAT, the VAT payable is £11,750 x 12.5% = £1,468.75.

This is £281.25 less than the output VAT you would pay under the standard scheme, but you cannot set off against it any input (purchase) VAT.

Full guidance on how the flat rate scheme operates with an on-line VAT calculator to help you decide whether FRS would benefit your business can be found on the HMRC web site under the section on choosing the right VAT scheme for your business.