An Introduction to VAT
VAT affects us all, both as individuals and as business people. The information below is aimed at helping you to understand what VAT is, how it is administered and what is required of those running businesses.
What is VAT?
VAT is a tax which is chargeable on supplies designated by the government as taxable and which are made by those defined as ‘taxable persons’. Where VAT has been paid to other businesses, credit is given. The net balance is payable (or may be reclaimed), usually quarterly.
A taxable person is defined as one of the following carrying on a business:
- An individual
- A partnership
- An unincorporated association, e.g. trust or charity
- A limited company
VAT applies to the supply of any goods or services. This includes sales, hire and loan of goods and may be of a revenue or capital nature.
There are four main categories:
- Positive rated - taxable at 20% or 5%
- Zero rated - including socially or economically important items, e.g. exports, most food, books, newspapers, public transport, drugs on prescription, children’s clothing
- Exempt supplies - including necessities such as insurance, postage, finance, education, and health
- Some receipts are outside the scope of VAT, e.g. dividends, shares of profit compensation for losses, non
Do you need to be registered for VAT?
You are required to notify HM Revenue & Customs if:
- Vatable turnover for the past twelve months exceeds £70,000.
- There are reasonable grounds for believing that your turnover for the next 30 days will exceed £70,000.
In the first case, notification must be within thirty days of the end of the relevant months. In the latter case, notification must be within thirty days of the date on which grounds first existed.
You need to monitor your turnover constantly because if you fail to spot that it has reached, or is about to reach, £70.000 and are therefore late in registering, there will be a penalty to pay, as well as the tax for which you are liable.
Registering for VAT when vatable turnover is less than £70,000
You may, if you wish, register voluntarily for VAT, provided you have a bona fide business.
Two schemes worth noting
Cash accounting scheme
This is a special scheme which is applicable to businesses where taxable turnover is not expected to be more than £1,350,000 in the next 12 months. It allows the trader to account for VAT on the basis of payments received and made rather than on tax invoices issued and received. If you wish to take advantage of this scheme you should consider using cash accounting from the date you register.
This scheme will not necessarily be the best one for you; I will be able to advise you on this.
There are special schemes of accounting for VAT available to retailers. Again, I will be able to advise which, if any, of these schemes would be best for you.
Claiming credit for VAT paid on input goods and services
Tax you pay on purchases (input tax) can be recovered if you are a registered taxable person. In practice, are able to offset input tax against your output tax liabilities. If you are a traders with fully exempt outputs, you are not able to register or reclaim any input tax.
You are not able to claim credit for VAT paid on things such as private expenditure, business entertainment, motor vehicles, certain building materials and goods bought second-hand. In all other cases credit can be claimed provided you have a VAT invoice.
If your business makes taxable and exempt supplies, there may be some restrictions on what you can recover.
Frequency of VAT returns
You will be issued with a return each quarter, which you will be required to return within thirty days of the end of the quarter. Late returns are subject to a penalty in addition to the tax liability.
Although quarterly returns are the norm, some businesses make monthly returns and there is an Annual Accounting Scheme where returns are made once a year within two months of the end of the accounting year.
Filing your VAT returns
HM Revenue & Customs (HMRC) have begun the process of phasing out paper VAT returns. Registered businesses with an annual turnover of more than £100,000 (excluding VAT) will have to file their VAT returns online and make payments electronically. All newly registered businesses will also have to file and make payments online, regardless of their turnover.
You will, of course need to keep your records; I can advise you on this and can file your returns for you.
Deregistering for VAT
Changes in circumstances may require you to deregister or make it advantageous to do so. If you cease trading, you must deregister. If your anticipated turnover for the coming year is less than £68,000, then you are able to deregister. This may or may not be best for your business. I will be happy to advise.
All VAT invoices are required to include certain information in a specified form, to enable assessment of liability for tax and entitlement to recovery. (See below)
Where a supply is zero-rated or exempt, there is no requirement for a VAT invoice to be issued. However, it is useful to issue such an invoice to identify that VAT has not been charged.
You must retain all copies of all tax invoices issued and received for at least six years. (Sometimes a shorter period (normally at least three years) is agreed with HMRC)
These are the things that a full VAT invoice must show:
- A sequential number based on one or more series which uniquely identify the document
- The date of the supply and the date of issue of invoice
- The name, address, and VAT registration number of the supplier
- The name and address of the person to whom the goods and services are supplied
- A description that is adequate for the purposes of identifying the goods or services supplied
- For each description the quantity of the goods or the extent or nature of the services, a unit price, the rate of tax, and the amount payable, excluding tax
- The total amount payable excluding tax
- The rate of any cash discount offered
- The total VAT payable
If your business supplies certain specialized goods or services, there may be additional requirements
A simplified VAT invoice can be issued where the supply is direct to the public and has a tax inclusive value of supply less that £250. In this case the following details must be shown:
- Name, address and VAT registration number of the retailer
- Date of supply
- A description, adequate to identify the goods or services supplied
- The total amount payable including tax
- The rate of tax at the time of the supply
There is no requirement to issue a VAT invoice where supplies are direct to the public unless the customer requires one.
Paying your VAT
If you were registered for VAT before April this year and your annual turnover does not exceed £100,000, you may still make paper returns and pay by cheque. You will need to ensure that any cheque payment is cleared by the due date.
You can pay electronically in one of four ways;
- Internet banking
- Bank giro credit
- Direct debit
If you pay electronically, then up to seven extra days are allowed for the return and payment to reach HMRC but you will still need to pay attention to payment clearance times.
In the case of a Direct Debit, as well as the extra 7 calendar days there will be a further 3 working days before payment is collected from the payer’s bank account.
Keeping up with legislative requirements
It is your responsibility to keep up to date with VAT requirements. This can be difficult when you are concentrating on running your business. I pride myself on being fully up to date, not only with VAT requirements, but with all legislation connected with book keeping and can relieve you of the burden of compliance.
If you have any enquiries or would like further information on the services provided, please feel free to contact me. Some of my services are; Bookkeeper Dorset, Payroll and self assessment Tax Return Dorchester.