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All you need to know about registering for VAT and picking out the best scheme for your business.
Once you hit the turnover threshold, VAT accounting is a legal obligation, you are required to register and pay VAT, which currently stands at 20%.
Businesses are obliged to submit VAT returns four times a year, with any VAT tax owed having to be paid quarterly. VAT refunds due have to be repaid quarterly as well.
The amount of tax you pay is essentially calculated by comparing the amount of VAT owed by sales with the amount VAT due on your costs.
However, if you pay too much VAT, HMRC will refund you the difference.
As a business owner, you’re required to register for VAT as soon as your earnings exceed a threshold amount, which can change from year to year.
But you might also need to register in some other cases, depending on the kinds of goods or services you sell and where you sell them.
Currently, you must register for VAT if you expect your taxable turnover to be more than £85,000 in the next 30-day period and if your business had a taxable turnover of more than £85,000 over the last 12 months.
Your VAT-taxable turnover equals the total amount of everything sold. However, you do not need to include anything which is VAT exempt.
So, let's assume that in three months, you receive £2,000 in VAT from customers. However, in this period, you also purchase something from a supplier which adds up to £300+ VAT, which equates to £360.
The amount you have to pay to HMRC is the VAT you have collected, which is also referred to as ‘output VAT’, minus the ‘input VAT’ you have paid out. So, in this example, you will be paying HMRC £1,940. (£2,000 minus £60.)
Besides the possible financial gain, not registering for VAT could give customers the impression you are making less than £85,000 a year. This could be a disadvantage in terms of your reputation, especially if you want to give the impression that yours is a big, successful company.
In addition, when you’ve registered for VAT, you’ll usually need to include VAT in your prices. That can give competitors who aren’t registered for VAT an advantage.
But, on the other hand, you can reclaim the tax paid on business supplies, such as desktop computers, desks, chairs and other office supplies, which have VAT added to them.
Once registered, you need to choose a method of telling HMRC how much you have been charged and how much VAT you have paid.
Standard VAT accounting
The standard VAT accounting scheme is a method of reporting VAT based on when invoices are issued.
Businesses keep a record of all sales and purchases, which needs to be submitted to the government quarterly, with any VAT refunds also being repaid quarterly.
Flat rate scheme
The flat rate scheme is generally aimed at SMEs and sole traders, alongside limited companies with a turnover below £150,000 per year.
With the flat rate scheme, businesses keep the difference between what they have charged customers and what they’ve paid to HMRC, while paying a fixed rate of VAT to HMRC.
If you use this scheme, you cannot reclaim the VAT on purchases, apart from certain capital assets exceeding £2,000.
Annual accounting scheme
The annual accounting scheme is designed for businesses with a turnover of £1.35 million per year or less.
This scheme allows you to make advanced payments towards your VAT bill based on your last return, or estimated if you are new to the business and to paying VAT.
With the annual accounting scheme, businesses are allowed to submit one VAT return a year.
However, when submitting a return, businesses have to make either a final payment, which is usually the difference between its advanced payments and actual VAT bills, or apply for refunds if they have overpaid.
Cash accounting scheme
The cash accounting scheme is aimed at businesses with a turnover of £1.35 million per year, or under.
These companies can pay VAT on sales when customers pay them as well as reclaim VAT on purchases they have made when they have paid their suppliers.
Whichever scheme you choose, there are restrictions which could affect your decision making.
For example, once you choose either the flat rate or annual accounting scheme, you are restricted from changing to another scheme within the first year.
As a general rule, you’re choosing between convenience and your bottom line. As always, if you’re unsure, talk to an accountant.