Did you know that there are over 2 million VAT registered businesses in the UK? That’s 600,000 VAT returns submitted every month, and around £125 billion in VAT paid to HMRC every year. If you’ve not come across it before, VAT stands for Value Added Tax, and is the charge added to nearly everything you buy in the UK. If you’re a business, you may be required to register for, collect and pay VAT – either straight away if you deal with products, or once you reach a certain income threshold. But despite it being a simple concept, it’s often a little confusing to work through. So today, we’re going to go through the 5 steps of VAT for business owners, and what you need to do.
The first thing to do is decide if you want to, or need to be registered for VAT. If your business deals mainly in services, then the odds are you won’t need to register right away. Instead, HMRC says that you don’t need to register until you have a taxable income over their registration threshold. At time of writing this is £85,000, but it can change every year, so you need to keep an eye on it, and your rolling 12-month income total. This is known as compulsory registration.
You also have the option of registering voluntarily, even if your taxable income is under the threshold. There are a few reasons you might want to do this – first because you think you will hit that threshold soon and want to avoid fines for missing it! Another is if you are charging VAT on your goods (which you should be if you are selling products) or services, since this will allow you to simply flow the money you charge into a separate account ready for HMRC. It also means you will be able to claim back the VAT you pay for goods or services from other businesses, which means you end up with a little more money in your pocket.
Understanding VAT Rates
Next, you need to understand the VAT rates – because there is more than one rate for VAT, and the rates apply to different things. Generally, VAT rates are split into 3, and this will impact what you charge, and what you pay.
- 20% VAT – This is the ‘standard rate’ VAT, and applies to most goods and services. This is what you should consider the default VAT rate, unless something specifically falls into the other 2 categories.
- 5% VAT – The ‘reduced rate’ of Vat applies to some goods or services, but not all. For example, children’s car seats, home energy, nicotine patches and boilers all fall under 5% VAT.
- 0% VAT – Zero-rated goods and services fall into this category. This tends to include most food and children’s clothes, along with advertising services to charities, equipment for the disabled and sewage services.
- Exempt – There are also some items that are completely exempt from VAT, like stamps, betting and gambling, financial transactions and property transactions.
You can find a full list of goods and services, along with their applicable VAT rates, on the .GOV website – just click here.
Now that you understand how it all works, you need to choose the right VAT scheme to register your business for. There are 4 ways your business can process, record and pay VAT to HMRC, and it’s generally up to you to work out which is more efficient for the kind of business you run. They are split down into:
Standard VAT Accounting: This is the most common method used by businesses, and requires you to keep a detail VAT record of all purchases and sales, and use it to complete a quarterly VAT return. You now need to do this in digital format with MTD compatible software, file the return with HMRC and pay any VAT due.
Annual Accounting VAT Scheme: Just like the standard accounting method, but you don’t need to fill in the quarterly returns. Instead, you have an annual VAT reporting and payment deadline, which you can meet by submitting an online form. You will still have to make interim payments every quarter though.
Flat Rate Scheme: Best for product-based businesses, allowing you to pay a percentage of your total turnover as VAT. The actual amount depends on the type of business you run and what industry you’re in, as different industries have different VAT rates.
Cash Accounting Scheme: With cash accounting, you account for VAT on the date you’re paid, as opposed to the date you send the invoice. Not ideal for businesses who buy a lot of items on credit, as you can’t reclaim the VAT until the full payment has been made.
We’ve written an in-depth guide on the Vat schemes and how to choose the right one for you, and you can read it here.
Creating VAT Returns
Once a quarter you will need to create your VAT return ready to submit. This means you will need to gather some information together for that accounting period and enter it into the HMRC digital portal. This includes:
- Your total sales and purchases
- What your VAT refund from HMRC is
- The amount of VAT you can reclaim
- The amount of VAT you owe
It’s important to note that if you’re registered for VAT, you have to do this even if you have no VAT to pay or reclaim in that period.
Sending Your VAT Returns
Now it’s time to submit your VAT returns, and like the rest of the process, you have some options. You can:
- Use HMRC’s free online service
- Use compatible accounting software
- Authorise your accountant to submit them for you
The last 2 are the most common, and make it easier for you to focus on your business instead of on your VAT returns all the time. At Cove Accountancy Services, we specialise in providing a completely outsourced VAT service for your business, so you don’t need to worry about the ongoing management of it. Instead, just let us take on the paperwork so that you can go back to doing what you love. For more information on our VAT services, just get in touch with us today.