A business registered for VAT acts in a similar way to a collector of unpaid tax and are therefore, required by law to accurately and promptly account for all the tax revenue they have collected. HMRC police the VAT system with severe penalties for any breaches of its legislation. It is not acceptable to claim ignorance to the rules when you don't comply with them.
This is why we recommend that you seek very professional and specific advice for your own circumstances. There are some situations when it may still be beneficial to register for VAT even if your turnover is not within the registration threshold.
What is VAT
VAT is what is known as the Value Added Tax that is chargeable against sale of services or products. A transaction is taxable for VAT if:
VAT input and output
Sales have VAT charged on them by businesses and this is referred to as Output VAT; with the sales themselves being referred to simply as Outputs. In a similar way the majority of services and goods have VAT charged against them and this is known as Input VAT.
While Output VAT is collected by you from your customer on behalf of the HMRC and paid regularly; Input VAT against services and goods is allowed to be subtracted from the amount of Output Tax you owe. It is important to keep in mind that there are certain Input Tax categories that you can never reclaim, including those related to third party UK business entertainment services and goods and the majority of business cars.
There are three different rates applied to taxable supplies - zero rate (0%), reduced rate (5%) and standard rate (20%). A number of very specific taxable supplies only have the reduced rate of 5%.
There are also some supplies that are not taxable at all and these are referred to as exempt supplies. It is important to note the difference between zero rate supplies and exempt supplies.
When registration is necessary?
VAT registration is necessary if your taxable supplies value is higher than the fixed annual amount, which was £81,000 as of 1st of April 2014. It is crucial you understand that the annual amount is for the last 12 months, not the last tax year or financial year. You should check your turnover each month and calculate your company's sales for the last 12 months and be aware of when it approaches the VAT registration threshold.
You can apply for what is known as voluntary VAT registration if you are making taxable supplies below the fixed limit. This enables you to reclaim the Input VAT which could mean your company receives a repayment if you are predominately making zero rate supplies.
If you haven't yet but will be making taxable supplies in the near future, you are also able to apply for VAT registration. This can allow you to recover Input Tax for the start-up expenses.
An individual who intends to or makes taxable supplies is known as a taxable person and is legally required to be VAT registered. With regards to VAT registration, a taxable person could be:
If you are running two or more businesses, you need to add together the value of the supplies made for all of them to determine if you need VAT registration or not.
Once you have registered, you are required to make a return to HMRC every quarter showing how much Output Tax should be accounted and the deductible Input Tax together with other statistical information. You have to file your return online.
Returns should always be completed and submitted with around one month and 7 days before the end of the period they cover. Ally payments for a specific period are required to be made by the same deadline. It is compulsory for you to make payments electronically.
If your business makes zero rate supplies and receives VAT repayments, you may find it of benefit to submit returns on a monthly basis.
If you expect your business to have annual taxable supplies that do not amount to more than £1,350,00, you are able to join the annual accounting scheme. A benefit of this is that you only have to make one return for your VAT at the end of the year, but have to make VAT payments on either a monthly or quarterly basis.
It is crucial that you keep your records up to date if you are registered for VAT. This includes the details of all the expenses, purchases and supplies related to the business.
Additionally, you should carefully maintain a VAT account. This account is basically a summary of payable Output Tax and recoverable Input Tax accrued by your business. You are required to keep these records on file for a minimum of 6 years.
While maintaining your records and calculating liability is your responsibility as a registered taxable person, the HMRC needs to be able to check that the VAT amount that is being paid is correct. Therefore, occasionally a VAT officer will come to inspect your business records. This is referred to as a control visit.
The aim of the visit is for the VAT officer to ensure you are applying VAT correctly and that all VAT records, including returns, are being completed correctly.
HMRC have a wide range of powers that allow them to penalise your business if you incorrectly apply or flat out ignore proper VAT regulations. The penalties can be levelled against you for:
Cash accounting scheme
VAT can be accounted for on the basis of cash you pay/receive rather on invoice dates, if your business has a turnover less than £1,350,000.
As it is not particularly practical for the majority of retailers to maintain the records required of registered traders, there are special schemes specifically designed for them.
Flat rate scheme
If you own a small business, the Flat Rate Scheme might suit you as it allows you to pay VAT amounting to a percentage of your total income. This means that no claims need to be made to recover Input Tax. The goal of the scheme is to make the process of accounting for VAT easier and simpler for smaller businesses, though for some it can mean they benefit from a reduction in VAT they are due to pay.
Whether it's as a stand alone service, or as part of your company incorporation, we offer VAT registration. Please contact us directly if you have any questions or would like further information. Email to [email protected] or call 020 7372 8960.