VAT

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Value Added Tax

What you need to know and why you should leave it to an accountant.

Table of Contents

Value Added Tax (VAT)

What is Value Added Tax (VAT)?

VAT is a taxed charged on most goods and services within the UK and EU. There are 3 tax rates of VAT currently being:

  • Standard Rate (20%)
  • Reduced Rate (5%)
  • Zero Rate (0%)

As well as the above 3 VAT rates goods and services can also be exempt, or ‘outside the scope of VAT’.

How do I register for VAT?

VAT registration can be completed online, or you can ask our accountants to do it for you. The online application will ask you several questions about your business, as well as future trading expectations and whether you want to register for standard rate or flat rate VAT.

Why would I voluntarily register for VAT?

There are a few reasons why you should consider registering for VAT voluntary

  • Registering for VAT can give the impression to customers and suppliers that you are a more reputable business.
  • If your business turnover is around the £85,000 level, then registering now avoids the liklehood of any penalties that may be incurred if you go over the VAT registration limit but have not yet registered.
  • It may be that you are eligible for VAT refunds which are great for cash flow, this is partially true in the start up phase of the business, although your sales may be low, you will most likely be incurring costs which you can claim the VAT back on so you may actually receive money back from HMRC.
  • When you register for VAT you can reclaim any VAT incurred on services you have paid for up to 6 months prior to your registration, and up to 4 years for any goods that you still have.

What is the difference between standard rate and flat rate?

  1. Standard Rate VAT is open to everyone and means you can reclaim VAT on any eligible purchase or expense you make. Standard rate VAT registration is generally the best route to go down if your VAT-taxable expenses are over 2% of your turnover.

 

  1. Flat Rate VAT is available if your turnover is less than £150,000 and involves using an industry sector VAT rate determined by HMRC and paying this over to HMRC. In this scheme you do not reclaim VAT on purchases or expenses unless it is on certain capital assets over £2,000. In order to calculate the amount of VAT you need to pay over you add the standard rate of VAT (20%) to your net invoice which your customer then pays you. You then pay over to HMRC the VAT based on your industry sector.

If you need any further support about deciding which rate is best for your business, please contact us.

What are the reporting requirements?

You usually submit a VAT Return to HM Revenue and Customs (HMRC) every 3 months. This period of time is known as your ‘accounting period.’

The VAT Return records things for the accounting period such as:

  • your total sales and purchases
  • the amount of VAT you owe
  • the amount of VAT you can reclaim
  • what your VAT refund from HMRC is

You must submit a VAT Return even if you have no VAT to pay or reclaim.

Your VAT return must be submitted to HMRC and any VAT tax payable must be paid by 1 month and 7 days following the ‘accounting period’. For example, if your VAT return covered the period 1st January to 31st March, the VAT return and payment must reach HMRC on or before 7th May. Failure to do so may result in penalties and surcharges.

How do I pay?

The easiest way to pay your VAT and to ensure payments are never late is to set up a direct debit via your online VAT account. Your accountants can do this for you if they are set up as your agent.

If you don’t have a Direct Debit set up you can refer to this link for alternative methods of payment.

https://www.gov.uk/pay-vat

What if I don’t submit or pay on time?

HMRC will record a default if you fail to submit your VAT return by the deadline or fail to pay any VAT due by the deadline.

Once you default you will enter a 12-month default period, if you default again during this 12 month period:

  • The default period is extended by a further 12 months
  • You will be liable to the surcharges indicated below

Defaults within 12 months

Surcharge if annual turnover is less than £150,000

Surcharge if annual turnover is £150,000 or more

2nd

No surcharge

2% (no surcharge if this is less than £400)

3rd

2% (no surcharge if this is less than £400)

5% (no surcharge if this is less than £400)

4th

5% (no surcharge if this is less than £400)

10% or £30 (whichever is more)

5th

10% or £30 (whichever is more)

15% or £30 (whichever is more)

6 or more

15% or £30 (whichever is more)

15% or £30 (whichever is more)


HMRC can charge you a penalties on top of surcharges of up to:

  • 100% of any tax under-stated or over-claimed if you send a return that contains a careless or deliberate inaccuracy.
  • 30% of an assessment if HMRC sends you one that’s too low and you do not tell them it’s wrong within 30 days.