Clive Lewis, ICAEW Head of Enterprise, and X-Forces Director Vin Murria have written this useful summary in response to the question What do I need to understand about VAT?
This, according to the piece, published over on the X-Forces monthly blog, is ‘One of the most frequently asked questions in X-Forces training, workshops and coaching’.
So in the piece they ‘outline the key considerations, requirements and best sources of advice for a small business’.
Here, we run through salient points.
Their starting point is the compulsory VAT registration threshold. ‘You must register for VAT if your turnover exceeds £83,000 in the previous 12 months (for 2016/17 tax year).’
But you can also voluntarily register at any time if your turnover is lower – unless your business sells only VAT-exempt goods or services.
Once your business is VAT-registered, says the piece, you have to charge VAT on your goods and services, and can reclaim that.
So, how does it work?, asks the blog.
Once you’re registered, it’s added to sales invoices, and will also be added to purchase invoices assuming the supplier is VAT registered. Invoices must include your VAT registration number.
‘Most items incur VAT at the standard rate (currently 20%) but some items are chargeable at the reduced rate of 5% or are zero-rated (0%).’
Then, every three months, you submit what’s called ‘a VAT return’ online to HMRC. You have to pay HMRC the difference between your output tax (on sales) and input tax (on purchases). If your inputs are higher than your outputs, HMRC will repay you the difference.
‘You must submit a VAT Return even if you have no VAT to pay or reclaim. Surcharges will apply for late payments.’
And beware, warns the piece. HMRC will mark a ‘default’ if you’re late making your return, or paying your charge.
If you understate or overclaim, you’re liable to a fine ‘of up to 100%’ of that tax amount. You must, by law, account for VAT on the full amount of all products or services you sell – even if you operate on part-exchange, or haven’t charged VAT to your customer. It’s irrelevant – you still need to pay it yourself.
But do remember, there are certain goods or services that operate outside the VAT system – you can’t or reclaim on them. And you can sell some goods and services to charities at the zero or reduced rate.
The blog post also details these other schemes and the pros of each:
1. Cash Accounting – or Receipts and Payments system: if your VAT taxable sales are under £1.6million. Good if cash flow or bad debt are issues
2. Annual Accounting: only needing one tax return a year, not quarterly
3. Flat Rate Scheme: paid as a flat rate percentage of turnover
4. VAT schemes for retailers: specifically for retailers, there are a few options
• Or our own ICAEW Business Advice Service