Value Added Tax (VAT) is one of the UK’s most complex taxes. There are so many rules, regulations and schemes that getting the right advice, at the right time, from a suitably qualified VAT professional, is essential for many businesses. For now, what are the key facts that small-business owners should know about VAT?
1 All businesses must register and account for VAT if their taxable turnover in the previous 12 months exceeds the VAT threshold. That includes sole traders (ie the self-employed) and members of an ordinary partnership, not just limited companies.
2 The VAT threshold for 2019/20 is £85,000 and it will stay this way until at least 1 April 2022.
TOP TIP >> The most common mistake owners make when considering whether to register for VAT is to assume that “turnover” relates to the current accounting year, rather than the 12 months leading up to the current date.
- So, for example, if your business year-end is 31 March and turnover to this date is £82,000, you may think that you don’t need to register for VAT. However, if your turnover in the first two months of the next year increased, taking the total from 1 June 2018 to 31 May 2019 to, say, £90,000, your business must register for VAT.
3 The taxable turnover threshold at which businesses can apply to de-register for VAT is £83,000 a year. This threshold will also remain until at least 1 April 2022.
4 You must also register for VAT if you:
- expect your turnover to go over the threshold in the next 30 days
- take over a VAT-registered business as a going concern
- sell goods into the UK from another EU country and exceed the “distance selling threshold” (ie £70,000 in 2019/20)
- buy goods from other EU countries totalling more than the VAT threshold in a year.
5 If your business is VAT-registered, you must charge VAT on all VATable sales. The standard rate of VAT is 20%; there is a reduced rate of 5%; some goods and services may be zero-rated.
6 When VAT-registered, you can reclaim VAT paid on your business purchases.
7 When your business becomes VAT-registered, it effectively becomes an unpaid tax collector for HMRC, because you pay HMRC VAT you’ve charged on goods or services you’ve sold, less VAT you’ve paid on things your business has bought.
8 After registration, you should tell your customers that you’re now VAT-registered. You then add VAT to the price of things they buy from you, detailing this amount on the invoice or receipt you give them.
9 Via their VAT returns, your VAT-registered customers can claim back VAT they’ve paid to you, so, the net effect is nil. Ultimately, they do not end up paying a higher price.
10 But, if your customers are not VAT-registered, they cannot claim back VAT they’ve paid to you. They must either accept this or to retain their custom you might meet them some of the way by reducing your prices/margins.
11 Adding VAT can make your prices less competitive when selling to those who aren’t VAT-registered. You should consider this when setting or agreeing a price if you become VAT-registered.
12 VAT-registered businesses must complete and file a VAT return, usually every quarter. To make sure you get your tax return in on time, keep your accounts up to date.
13 The VAT return is due seven days after the end of the month following the quarter-end date (eg 7 May for a 31 March quarter end; 7 June for 30 April quarter end, etc).
TOP TIP >> Because of the complexities of VAT, some business owners try to avoid registering for VAT by organising their business into separate parts, so they seemingly don’t reach the VAT threshold. HMRC will act against this and has published Targeted Anti Avoidance Measures, setting out how. Don’t be tempted to try to split up your business to avoid VAT accounting and admin.
14 A VAT invoice must generally show:
- a unique invoice number that follows on from the previous invoice
- the seller’s name or trading name and address
- the seller’s VAT registration number
- the invoice date
- the tax point (ie the time when a sale is treated by HMRC as having taken place) if this is different from the invoice date
- the customer’s name or trading name and address
- a description of the goods or services supplied.
15 For each type of item you sell you must show the:
- unit price or rate – excluding VAT
- quantity of goods or the extent of the services
- rate of VAT that applies to the items sold
- total amount payable – excluding VAT
- rate of any cash discount
- total amount of VAT charged.
- were bought by you as the “person” who is now registered for VAT
- are for VATable business purposes (ie not VAT-exempt items you sell)
- are still held by you or they’ve been used to make goods you still hold.
You can’t reclaim VAT on goods that you’ve completely used up before you registered for VAT (eg petrol, electricity or gas). You can’t claim back the VAT for items already sold to customers. You may be able to claim back the VAT on services for up to six months before your business became VAT-registered.
16 There are several special schemes that you can use if you are VAT-registered, including:
- Annual Accounting
- Cash Accounting
- Flat Rate
- VAT retail
- VAT margin schemes
- Tour Operators Margin scheme.
17 Getting tailored expert advice can ensure that you select the right VAT scheme for your business.
TOP TIP >> Although the Flat Rate Scheme used to be popular for those with limited expenses seeking to simplify their VAT admin, a change implemented from 1 April 2017 means it’s become much less appealing.
A limited-cost business must use a flat rate of 16.5% rather than the percentage that applies to its industry. And because it’s applied to gross turnover, the effective rate of VAT paid to HMRC is 19.8%, so the benefit is just 0.2%. The net effect is most limited-cost businesses should either de-registered for VAT (if their turnover allows) or move to standard VAT accounting, meaning they account for VAT on their sales and purchases.
You are a limited-cost business if the amount you spend on VATable goods including VAT is either:
- less than 2% of your VAT Flat Rate turnover
- greater than 2% of your VAT Flat Rate turnover, but less than £1,000 per year.
Note: The test applies only to goods and not services, with goods excluding things such as travel, rent, accountancy fees, insurance, etc. More on what “goods” includes can be found on government website gov.uk.
18 If you’re registered for VAT with a turnover of more than £85,000, you fall within the Making Tax Digital for VAT new reporting regime, which came into effect on 1 April 2019.
19 Under the new rules, you must file your VAT returns via a new HMRC digital gateway. You need not provide any additional information.
20 You must keep digital records, although this doesn’t mean having to buy expensive software. You can record things into a spreadsheet and send it to HMRC via bridging software.