VAT

VAT registered businesses act as unpaid tax collectors and are required to account both promptly and accurately for all the tax revenue collected by them.

The VAT system is policed by HMRC with heavy penalties for breaches of the legislation. Ignorance is not an acceptable excuse for not complying with the rules.

Below, we highlight below some of the areas that you need to consider. However, it is however important for you to seek specific professional advice appropriate to your circumstances.

What is VAT?

A transaction is within the scope of VAT if:

  • there is a supply of goods or services
  • it was made in the UK
  • it was made by a taxable person
  • it was made in the course or furtherance of business.

Inputs and outputs

Businesses charge VAT on their sales. This is known as output VAT and the sales are referred to as outputs. Similarly VAT is charged on most goods and services purchased by the business. This is known as input VAT. The output VAT is being collected from the customer by the business on behalf of HMRC and must be regularly paid over to them.

However the input VAT suffered on the goods and services purchased can be deducted from the amount of output tax owed. Please note that certain categories of input tax can never be reclaimed, such as that in respect of third party UK business entertainment and for most business cars.

Supplies

Taxable supplies are mainly either standard rated (20%) or zero rated (0%). There is, in addition, a reduced rate of 5% which applies to a small number of certain specific taxable supplies. There are certain supplies that are not taxable and these are known as exempt supplies.

There is an important distinction between exempt and zero rated supplies.

If your business is making only exempt supplies you cannot register for VAT and therefore cannot recover any input tax.

If your business is making zero rated supplies you should register for VAT as your supplies are taxable (but at 0%) and recovery of input tax is allowed.

Registration – is it necessary?

You are required to register for VAT if the value of your taxable supplies exceeds a set annual figure (frozen at £85,000 since 1 April 2017).

If you are making taxable supplies below the limit you can apply for voluntary registration. This would allow you to reclaim input VAT, which could result in a repayment of VAT if your business was principally making zero rated supplies. If you have not yet started to make taxable supplies but intend to do so, you can apply for registration. In this way input tax on start up expenses can be recovered.

Taxable person

A taxable person is anyone who makes or intends to make taxable supplies and is required to be registered. For the purpose of VAT registration a person includes:

  • individuals
  • partnerships
  • companies, clubs and associations
  • charities.

If any individual carries on two or more businesses all the supplies made in those businesses will be added together in determining whether or not the individual is required to register for VAT.

Administration

Once registered you must make a quarterly return to HMRC showing amounts of output tax to be accounted for and of deductible input tax together with other statistical information. All businesses have to file their returns online using software that meets requirements set by HMRC.

An online VAT return must be completed within one month and seven days from the end of the period it covers. Electronic payment is also compulsory for all businesses.

Businesses who make zero rated supplies and who receive repayments of VAT may find it beneficial to submit monthly returns.

Businesses with expected annual taxable supplies not exceeding £1,350,000 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 VAT return at the end of the year.

Making Tax Digital for VAT (MTDVAT)

Under MTDVAT, businesses with a turnover above the VAT threshold must keep digital records for VAT purposes and provide their VAT return information to HMRC using MTD functional compatible software.

There are some exemptions from MTDVAT. However, the exemption categories are tightly-drawn and are unlikely to be applicable to most VAT registered businesses.

How we can help

Ensuring that you comply with all the VAT regulations is essential. We can assist you in a number of ways including the following:

  • tailoring your accounting systems to bring together the VAT information accurately and quickly
  • ensuring that your business is VAT efficient and that adequate finance is available to meet your
  • VAT liability on time
  • providing assistance with the completion of VAT returns
  • negotiating with HMRC if disagreements arise and in reaching settlement
  • advising as to whether any of the available schemes may be appropriate for you
  • helping you comply with the MTD for VAT regime.

If you would like to discuss any of the points mentioned above please contact us.

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