VAT is a tax payable by the consumer but many businesses are forced to act as unpaid tax collectors. HM Revenue & Customs (HMRC) currently police the system and there are heavy fines for failing to operate the system properly. Consequently, you cannot just ignore VAT and there are certain areas you should consider in detail.
VAT applies to businesses that make supplies of goods or services. Businesses charge VAT on their sales and this is known as output VAT. Similarly, VAT will be suffered on purchases and this is known as input VAT.
If outputs exceed inputs, payments of tax have to be made to HMRC on a regular basis. If inputs exceed outputs, a repayment of tax will be made to the business. However, there are some types of input VAT, such as VAT on entertainment that are never reclaimable.
Certain supplies are not taxable at all and are known as exempt supplies. Others are taxable at the zero-rate (0%), reduced rate (5%) or standard-rate (17.5%). If the business makes totally exempt sales, you cannot register for VAT or reclaim any of the input VAT suffered. This can affect the competitiveness of your business.
If the business makes zero-rated sales, you can register and reclaim the input tax suffered. Your business can benefit significantly in this situation. However, what constitutes an exempt or zero-rated supply can be difficult to decide and may need careful consideration.
There is a flat rate scheme available for smaller businesses – see below.
You only have to register if the taxable supplies made by the business exceed an annual figure, currently £60,000. If your supplies fall below this you may be able to register voluntarily and obtain a repayment. This usually happens when you are making zero-rated sales.
Tax TipIf you are setting up a business but have not yet started making supplies, you should register so that you can reclaim your input tax on start-up expenses. |
You must keep detailed records of purchases, sales and expenses, as well as a summary of input and output tax. These records must be kept for six years. Failure to do so can lead to substantial penalties.
Generally, once registered you will make a quarterly return to HMRC, summarising the outputs and inputs. It must reach them within one month after the end of the quarter.
Businesses that make zero-rated supplies and receive repayments of VAT may find it beneficial to submit monthly returns.
Businesses with expected annual taxable supplies under £660,000 may apply to join the annual accounting scheme whereby they will make monthly or quarterly payments of VAT but will only have to complete one tax return at the end of the year.
The maintenance of records and calculation of the liability is the responsibility of the registered person but HMRC will need to be able to check that the correct amount of VAT is being paid over. From time to time therefore a VAT officer will come and inspect the business records. This is known as a control visit.
The VAT officer will want to ensure that VAT is applied correctly and that the returns and other VAT records are properly written up.
HMRC have wide powers to penalise businesses who ignore or incorrectly apply the VAT regulations. Penalties can be levied in respect of the following:
If your annual turnover is below £660,000 you can account for VAT on the basis of the cash you pay and receive rather than on the basis of invoices.
There are special schemes for retailers as it is impractical for most retailers to maintain all the records required of a registered trader.
This is a scheme allowing businesses with taxable turnover not exceeding £150,000 and total turnover not exceeding £187,500 to pay VAT as a percentage of their total turnover. Therefore no specific claims to recover input tax need to be made. The aim of the scheme is to simplify the way small businesses account for VAT.
The KeyMost problems with VAT arise from poor record keeping and lack of understanding of the VAT system. Remember, we can help you with both and make life a lot simpler. |