Should you apply for voluntary VAT registration ?

 

If your taxable turnover is below £85,000 you don’t have to register for VAT. However, you may be eligible to apply for ‘voluntary VAT registration’ and one or more VAT schemes.

There can be advantages in registering for VAT such as…

  • increased business credibility;
  • potential savings if you have zero-rated sales but you can still reclaim VAT on your purchases;
  • savings if you mainly supply other VAT registered businesses so they don’t mind being charged VAT. You can then reclaim VAT on your purchases;
  • Potential savings on the Flat Rate Scheme , but only if you have a favourable flat rate for your industry. Watch out if you don’t buy many goods – you may have to use 16.5%.

However, you do need to weigh up the benefits against the hassle factor of completing VAT returns. Plus you’ll need to do a little cashflow planning to pay the VAT due every quarter. If you supply the general public you will probably not want to register for VAT as this simply puts your prices up by the rate of VAT.

 

VAT Schemes

 

There are various VAT schemes, mainly for small businesses…

  • Cash accounting – If your taxable turnover is under £1,350,000 a year you can arrange to account for VAT on the basis of cash received and paid. The normal scheme is based on the invoice date or time of supply.
  • Annual accounting – You can complete one VAT return per year rather than four if your turnover is under £1,350,000. You must also make nine payments on account throughout the year, and a balancing payment with the VAT return.
  • Flat rate scheme – This is for businesses with a turnover of under £150,000. It saves on administration because you just pay a set percentage of your VAT inclusive turnover based on your business sector. The normal scheme accounts for VAT on each individual “in and out”. The Flat Rate Scheme can reduce the VAT you pay in some situations. See our Flat rate scheme calculator and guide for more details.
  • Retail schemes – These apply to retailers and offer an alternative if it’s not practical to issue invoices for a large number of supplies direct to the public.

 

When you must register for VAT

 

When your sales for the past 12 months exceed £85,000, you have to register for VAT within 30 days of going over. Not within 30 days of noticing! So, at the end of every month, you need to work out your total sales for the 12 months leading up to the end of that month. If it’s over £85,000, you have to register for VAT by the end of the next month and start adding VAT to your sales from then on. You’ll also be able to claim back VAT on your costs, so you may be able to lower your sales price.

 

How We Can Help You

 

We can assist you with Voluntary VAT Registration by…

  • helping you register for VAT
  • advising on suitability of VAT schemes
  • assisting with completion of VAT returns
  • setting up your accounting system to deal with VAT
  • helping remotely with any disputes with HM Revenue & Customs
  • providing VAT planning advice for complex transactions such as when buying property.

In the 2016 Autumn Statement, it was proposed that A new 16.5% VAT flat rate for businesses with limited costs will take effect from 1 April 2017.

The VAT Flat Rate Scheme (FRS) is a simplified accounting scheme for small businesses. Currently businesses determine which flat rate percentage to use by reference to their trade sector. From 1 April 2017, FRS businesses must also determine whether they meet the definition of a limited cost trader, which will be included in new legislation.

Businesses using the scheme, or thinking of joining the scheme, will need to decide whether they are a limited cost trader. For some businesses – for example, those who purchase no goods, or who make significant purchases of goods – this will be obvious. Other businesses will need to complete a simple test, using information they already hold, to work out whether they should use the new 16.5% rate.

Businesses using the FRS will be expected to ensure that, for each accounting period, they use the appropriate flat rate percentage.

A limited cost trader will be defined as one whose VAT inclusive expenditure on goods is either:

– less than 2% of their VAT inclusive turnover in a prescribed accounting period;
– greater than 2% of their VAT inclusive turnover but less than £1000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000).

Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:

– capital expenditure;
– food or drink for consumption by the flat rate business or its employees;
– vehicles, vehicle parts and fuel (except where the business is one that carries out transport services – for example a taxi business – and uses its own or a leased vehicle to carry out those services).

These exclusions are part of the test to prevent traders buying either low value everyday items or one off purchases in order to inflate their costs beyond 2%.

VAT Calculator

Do you need a quick VAT calculator to get from gross to net or from net to gross? Use our VAT calculator below.

Are you struggling to calculate VAT from gross or VAT from net amounts? That’s exactly what our VAT calculator can do.

What our VAT calculator doesn’t do is calculate the net or gross from the VAT amount. But here’s how you do it at 20%: multiply the VAT by 5 to get the net amount, or by 6 to get the gross amount.

If you need help with VAT returns, our Quarterly package from £40pcm includes VAT returns, Management Accounts, Annual Accounts, Tax Returns, Advice and regular reviews of your online accounting. See all of our fixed monthly fees or just ask us for a quote using our quick enquiry form.

We also have a Flat Rate VAT Calculator, which calculates whether you could save VAT under the Flat Rate VAT Scheme.

The VAT Calculator


Our VAT Calculator Guide for Beginners

Most purchases carry a VAT charge. Value Added Tax (VAT) is levied on most business transactions and on many goods and some services.

There are three rates of VAT in the UK:

  • 20% (the ‘standard’ rate) which our VAT calculator above uses
  • 5% (‘reduced’ rate) and
  • 0% (‘zero’ rate).

You will probably have to register for VAT if any of the following apply…

  • The taxable turnover of your business in the previous 12 months reaches the VAT registration limit (£85,000), although you can also register on a voluntary basis if your turnover is below this.
  • You believe your turnover in the next thirty days will exceed the registration limit.
  • You take over a business as a going concern whose turnover meets the conditions of the previous two points.
  • You buy goods from elsewhere in the EU to a value above the registration limit in one calendar year.

There are penalties for failing to register on time.

Goods and services liable to VAT are known as ‘taxable supplies’. Once registered you must charge VAT on all taxable supplies.

VAT doesn’t apply to everything. Supplies which are specifically not subject to VAT are referred to as ‘exempt’ and include: insurance, financial services, postal services, health and education, although there are exceptions in every category.

The amount of VAT payable to Revenue and Customs is the difference between your output tax on your sales and input tax on your purchases. If input tax is greater than output tax, a refund may be owed. The VAT due is normally payable each quarter following the submission of a VAT return, although under certain schemes the payments can be made monthly.

Should you register?

If your taxable turnover is below £85,000 you don’t have to register but you may be eligible to apply for ‘voluntary registration’.

There can be advantages in registering such as…

  • increased business credibility;
  • potential savings if your supplies are zero rated but you can still reclaim VAT on your purchases;
  • potential savings if you mainly supply other VAT registered businesses who don’t mind being charged VAT and you can then still reclaim VAT on your purchases.

This does however have to be weighed up against the hassle factor of completing VAT returns, and paying the VAT due every quarter. If you supply the general public you will probably not want to register as this simply puts your prices up by the rate of VAT.

VAT Schemes

There are various VAT schemes, mainly for small businesses…

  • Cash accounting – If your taxable turnover is under £1,350,000 a year you can arrange to account for VAT on the basis of cash received and paid, rather than the invoice date or time of supply.
  • Annual accounting – You can complete one VAT return per year rather that four if your turnover is under £1,350,000. You must also make nine payments on account throughout the year, and a balancing payment with the VAT return.
  • Flat rate scheme – This is for businesses with a turnover of under £150,000 and saves on administration as you just pay a set percentage of your VAT inclusive turnover based on your business sector rather than accounting for VAT on each individual “in and out”. It can also reduce the VAT you pay in some situations.
  • Retail schemes – These apply to retailers and offer an alternative if it’s not practical to issue invoices for a large number of supplies direct to the public.

How We Can Help You

We can assist you with…

  • registering for VAT
  • advising on suitability of VAT schemes
  • assisting with completion of VAT returns
  • setting up your accounting system to deal with VAT
  • representing you in any disputes with HM Revenue & Customs
  • providing VAT planning advice for complex transactions such as when buying property.

If you need help with VAT returns, our Quarterly package from £40pcm includes VAT Returns, Management Accounts, Annual Accounts, Tax Returns, Advice and regular reviews of your online accounting. See all of our fixed monthly fees or just ask us for a quote using our quick enquiry form.

Disclaimer

Flat Rate VAT Scheme

The flat rate VAT scheme is designed to make it simpler and quicker for small businesses to complete their VAT return.

This is because VAT payable to HMRC is calculated as a particular percentage of the gross turnover of the business and not as the difference between VAT on individual sales and purchases. In particular there is no need to record the VAT incurred on most purchases and determine whether it is reclaimable or not, so there is less chance of error. The amount of VAT charged to customers remains the same whether using the VAT flat rate scheme or not.

However, some business will pay less VAT by using the flat rate scheme and some may pay more by using it as the percentages used are based on the average VAT payable by particular trade sectors. It is important to calculate the financial effect before applying to use the flat rate VAT scheme. See our Flat Rate VAT Calculator below.

If you need help with VAT returns, our Quarterly package from £40pcm includes VAT returns, Management Accounts, Annual Accounts, Tax Returns, Advice and regular reviews of your online accounting. See all of our fixed monthly fees or just ask us for a quote using our quick enquiry form.

 

The VAT Flat Rate Scheme Calculation

These are the steps in the calculation…

  • The output VAT for a VAT return is established by multiplying the VAT-inclusive turnover by a fixed percentage which is determined by the sector in which the business operates. This goes in Box 1 on the return.
  • All turnover is included in the taxable supplies it has made, whether standard, reduced, zero rated or even exempt and it is the gross turnover.This figure goes into Box 6.
  • Usually no VAT can be reclaimed on purchases but there are exceptions for any VAT on purchases before the business was registered and VAT and on a single capital asset that costs over £2000 inclusive of VAT can be reclaimed. The VAT on these goes in Box 4 as usual and the net amount of the purchase in Box 7.

So if for example your gross turnover comes to £20,000 and the percentage for the sector is 10%, the VAT due is £2000. If what you purchased was a capital asset for £3833 including £500 of VAT , then the VAT payment due would be £1500.

To qualify to join the flat rate VAT scheme…

  • A business must have a taxable turnover, excluding VAT, of no more than £150,000 a year. The taxable turnover is the total value of supplies or sales made by the business that are liable to a VAT whether at standard, reduced or zero rates, but excluding any expected sales of capital assets.
  • A business must not already use the second hand goods, the tour operators or retail schemes.
  • The business must not be required to use the capital goods scheme for certain capital items.
  • A business must not have been found guilty of a VAT offence in the past year or be associated with another business or registered as part of a VAT group in the past 2 years.

A business must apply to join the flat rate VAT scheme and can leave whenever it chooses by informing HMRC in writing.

The Business Sector VAT Flat Rates

Different business sectors must use their own flat rate VAT.

A business must choose its sector on the grounds that it most closely describes its main trading activities. If the trading mix changes, so say the majority of the turnover comes from supplying restaurant meals rather than alcoholic drinks the trade sector to be used will change from ‘Pubs’ (6.5%) to ‘Catering Services’ (12.5%). The change in sector should be made from the start of the VAT period that contains the anniversary of joining the flat rate VAT scheme.

It is advisable to set out in writing why you made the selection of trade sector.

A lot of the rates changed following the VAT increase to 20% on 4th Jan 2011. Here are the rates from 4 Jan 2011.

1% Reduction in First Year of VAT Registration

In your first year of VAT registration there is a 1% reduction in the flat rate VAT that is applied to your turnover. The reduction is for for the 12 months following the date of VAT registration and not the date of joining the flat rate scheme. There is no entitlement to the 1% reduction if you register for VAT 12 months after you were required to register.

A Trap in the Flat Rate Scheme

The flat rate must be applied to all business income, including rents and sales of assets where VAT was not reclaimed, such as cars or property, but not interest received from business bank accounts. This means you effectively pay VAT on the gross receipts of sales on which you have not collected any VAT.

If you are a sole-trader the flat rate should be applied to any letting income you receive in your sole name, as lettings are regarded as a business for VAT purposes. Lettings undertaken as a partnership, perhaps jointly with your spouse, are not counted as part of your sole-trader business income. When you sell a let property the flat rate should be applied to the total proceeds. You can withdraw from the flat rate scheme before you sell a high value item such as a property, but you have to stay out of the scheme for at least 12 months.

How We Can Help You

We can advise you on the suitability of the flat rate scheme for your business, applying to join the scheme and assistance with completion of your VAT returns.

Flat Rate VAT Scheme Calculator

Click here if you can’t see it below.


If you need help with VAT returns, our Quarterly package from £40pcm includes VAT returns, Management Accounts, Annual Accounts, Tax Returns, Advice and regular reviews of your online accounting. See all of our fixed monthly fees or just ask us for a quote using our quick enquiry form.

Disclaimer

 

Our tax calculator tools will help you work out roughly how much tax is payable, and whether or not you can save tax doing things differently. These are UK tax calculator tools only, but our fuel cost calculator is not UK specific.

We have a PAYE tax calculator which is also a national insurance calculator to help you check your wages calculation is correct. Our incorporation tax calculator, is a corporation tax calculator and a self employed income tax calculator in one, so you can compare which will save you more tax. Another popular one for small businesses is the VAT flat rate scheme calculator which helps determine whether or not you could save tax joining the VAT flat rate scheme.

Please note that no reliance should be placed on any of the calculators. They are not a substitute for proper professional advice.

Disclaimer

If your company makes a deliberate VAT return error, which results in less VAT being paid over to HMRC than is correctly due, you as the director of that company can be issued personally with a penalty. This very rarely happens, but the VATman does have the power to impose such penalties where he can show the underpaid VAT was due to the dishonest conduct of one or more of the directors.

Two recent cases illustrate the types of situations where a personal penalty can be imposed:

Mr Brookes is the sole director of a building company. A VAT inspection found suppliers’ invoices to support VAT inputs were missing. Brookes obtained ‘copy’ invoices from the main suppliers, but those ‘copies’ were found to be very poor forgeries. Brookes was served with a personal penalty of £43,753 which was 60% of the over claimed VAT.

Mr & Mrs Walker failed to submit eight successive VAT returns for their company. The VAT office issued estimated VAT return assessments to the company which were less than the VAT eventually found to be due, and the Walkers did not challenge those estimated assessments. The Walkers were served with personal penalties totalling £194,214.

If you are getting in a mess and are worried about making VAT return errors, ask us to help you out before things get really serious! Our Quarterly package from £40pm, and Monthly bookkeeping package from £70pm  include preparing your VAT returns and more. Use the buttons below for more details.

Newsletter issue – August 2013. Sign up now and receive 2 free tax saving guides.