Introduction to VAT
Value added tax is a tax on sales, or sales tax and can be a minefield for new businesses. The rules can be very complicated and it is here that having a good accountant will pay dividends.
If your annual sales or turnover breaches, or looks set to imminently breach the threshold for VAT registration (£85,000 in 2017), then you must by law register for VAT and start submitting VAT returns. These returns will normally be quarterly with tax owed paid over by the end of the following month.
There is a Flat Rate Scheme which was introduced for simplicity of reporting and as an incentive for small business. In this scheme you charge a percentage of your gross turnover (sales including VAT) as the VAT you owe. These rates varied by business sector and most were quite favourable in that a net saving was made in this calculation. This has been tightened up in the latest budget, so much so that many small businesses are de-registering from VAT altogether as a result.
Standard VAT returns mean charging the applicable VAT rate on sales, deducting the VAT the business has paid on its purchases and paying over the difference. EU sales must be included and an EC sales list filled out also. International sales outside of the EU have a 0% VAT rate. You cannot claim back the VAT on entertainment expenses and there are special rules regarding money spent on cars and staff travel expenses. Businesses can use estimated figures with permission from HMRC, providing real figures are used in the subsequent return. The VAT paid over on sales which later becomes a bad debt can be recovered via the VAT return.
VAT reporting can all be done online and businesses will have an online VAT account where deadlines can be seen. As said these will be quarterly for most unless a business qualifies to report annually. If the VAT return is not submitted on time, or the VAT is not paid by the deadline, the business will 'default' on its VAT requirements. HMRC may then decide to put it into a 12-month surcharge period. If you default again during this surcharge period it may be extended for a further 12 months and you may have to pay a financial penalty, or surcharge, which is a percentage of the VAT owing.
For late returns/payments, HMRC will send the business a 'VAT notice of assessment of tax'. This must be paid immediately. If it is too low an estimate, you must inform HMRC within 30 days. The only way to reclaim the excess if you think it is too high is to submit a correct return. Interest will be charged at a standard rate, currently 2.75%.
If this all doesn't sound complicated enough, before businesses get to the reporting stage, they must of course charge the correct level of VAT on their sales invoice. The standard rate is 20% and this will cover the majority of transactions. However the rate may be reduced to 5% for some goods or even 0% for others. Goods may even be exempt from VAT and this is confusingly distinct from the 0% rate. It is advisable to read up on these distinctions as it does have implications, for one a business that sells exempt goods cannot register for VAT. As said above, Non-EU sales are zero-rated, but the rate on EU sales depends on whether the business is registered for VAT in their country (zero-rated), or not (usual rate). For sales to EU individuals it follows that sales will have VAT added.
A bit of a whistle-stop tour of Value-Added Tax there, I hope you found it informative. Next week we're going to do something a bit more straightforward in tax terms: inheritance tax.
Have a good week!