Value added tax (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 HM Revenue and Customs (HMRC) with heavy penalties for breaches of the legislation. Ignorance is not an acceptable excuse for not complying with the rules.
The following are the areas which you need to consider.
What is VAT?
A transaction is within the scope of VAT if:
- there is a supply of goods or services
- made in the UK
- by a taxable person
- 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.
Generally, 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 business entertainment and, for most business, cars.
Taxable supplies are mainly either standard rated (20%) or zero rated (0%). In addition, there is 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 cannot therefore 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. From April 2011, this is £73,000.
If you are making supplies below the limit you can apply for voluntary registration. This would allow you to reclaim input VAT. Also, 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.
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:
- Companies, clubs and associations
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.
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.
This must be completed within one month of the end of the period it covers (except for those on the annual accounting scheme who have two months – see below) and filed online. Any net VAT due must also be paid.
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 under £1.35m 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.
It is important that a VAT registered business maintains complete and up to date records. This includes details of all supplies, purchases and expenses. In addition a VAT account should be maintained. This is a summary of output tax payable and input tax recoverable by the business. These records should be kept for six years.
Inspection of records
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.
Offences and penalties
HMRC have wide powers to penalise businesses who ignore or incorrectly apply the VAT regulations. Penalties can be charged in respect of the following:
- Late returns/payments
- Late registration
- Errors in returns.
Cash accounting scheme
If your annual turnover is below £1.35m you can account for VAT on the basis of the cash you pay and receive rather than on the basis of invoices. This may be worthwhile if your customers take a long time to pay you.
There are special schemes for retailers as it is impractical for most retailers to maintain all the records required of a registered trader. Also, it may be useful to consider using a Flat Rate Scheme, which is designed to simplify the VAT reporting process.
Ensuring that you comply with all the VAT regulations is essential. We can assist you in a number of ways including tailoring your accounting systems to bring together the VAT information accurately and quickly, ensuring that your business is VAT efficient, and providing assistance with the completion of VAT returns. If you would like to discuss any of the points mentioned please contact us.