Let’s get something out in the open right now – VAT is not a scary word. VAT, or value added tax, is just another part of running a business in the UK. Most businesses in the UK who sell products have to be registered for VAT, and most who offer services as well too. It doesn’t matter if your customer is another business or a consumer. However, as a business you can reclaim VAT that you pay on business expenses, as long as you’re VAT registered. But there are a few different VAT schemes available, so how do you know which one is best for your business?
When Should You Register For VAT?
In the UK, once your business earnings pass a certain threshold, you legally have to register for VAT. We would tell you what that threshold is, but it changes year on year, so you can check the current rate by clicking here. You have 30 days from when you go over the threshold to register, so it’s important to keep an eye on your income and know what the threshold is. If your business earns less than that, then registering for VAT is optional, and there are some advantages and disadvantages to doing so.
- You can reclaim VAT paid for business purposes – which helps save you money
- It looks professional – it makes you look bigger to other businesses
- You’ll have to charge more – you’ll need to add VAT to your prices
- You’ll have to do more accounting – VAT requires quarterly returns to be filed
Choosing A VAT Scheme
Once you’ve registered for VAT, you’ll need a system for telling the government how much VAT you’ve charged and how much VAT you’ve paid. There are 4 ways you can do this:
Standard VAT Accounting Method
The common method for tracking VAT is to keep a detailed VAT record of all purchases and sales. This can be done through accounting software or HMRC’s agent software (which will be launched in April next year), and that information is used to complete your quarterly returns through HMRC’s digital platform.
Annual Accounting VAT Scheme
This method is 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 need to make quarterly interim payments, which allows you to spread the cost of VAT payments across the year and helps you plan your cash flow more efficiently.
Flat Rate Scheme
This model has undergone some changes recently to stop contractors from making a profit on the scheme, so now this scheme is more appropriate for product based businesses and not service based ones. So if you run a service based business, you can skip this section. I also can’t be used alongside the cash accounting scheme, as flat rate VAT has its own cash-based method for calculating VAT and turnover.
Under this scheme, you simply pay a percentage of your total turnover as VAT. The actual amount you pay depends on the type of business you run, as different industries have different flat VAT rates – you can find out what yours is here. Since the changes last year the flat rate for businesses with limited costs was set at 16.5%. However using this model you may end up overpaying or under-paying HMRC at times, so you may still be required to make a final payment or receive a refund. You’ll still have VAT on your invoices, but you don’t have to account for the VAT details of every purchase. But you can only use this scheme if your business has an annual turnover below £150,000.
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. This can be especially helpful if you have slow paying clients, since you won’t have to pay VAT before you’ve received the money. However, this option isn’t really suited for businesses that buy a lot of items on credit, since you can’t reclaim the VAT until the payment has been completed. So if it takes you 3 months to pay off the purchase, you can’t reclaim the VAT until that third payment has been made. And you still have to complete your quarterly returns online. If your business has an annual turnover above £1.35 million, then you can’t use this scheme for VAT.
What a lot of people take from that is that a lot of accounting and form filing needs to be done, no matter what VAT rate you choose. And to some extent, that’s true. But that doesn’t mean you have to be the one doing it. 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.