Answers to some of the most frequently asked questions about VAT...
- What is VAT?
- When do I have to register for VAT?
- How do I register for VAT?
- When do I charge VAT on my sales and other supplies?
- Can I register for VAT even if I am not at the mandatory threshold amount?
- How often is VAT paid?
- Flat rate scheme, how does it work?
- How do I reclaim VAT on my purchases?
1. What is VAT?
VAT stands for Value Added Tax. If you are VAT registered you need to add 20% (2013) on top of whatever you sell. To make things a little more complicated there are certain things that are zero rated like: food, books, newspapers and magazines, young children's clothing and footwear but I wouldn't worry about these for now.
2. When do I have to register for VAT?
If in the previous 12 months your turnover has reached the VAT threshold amount of £79,000 (As of April 2013) or you expect your turnover to reach £79,000 in the next 30 days then it is mandatory that you must register for VAT.
If you are under the VAT threshold amount of £79,000 then you do not have to charge VAT on your goods and services. The threshold amount can change so make sure to check the HMRC website each year to ensure you are not over or under this amount.
3. How do I register for VAT?
Once you are at the required threshold amount or if you have voluntarily registered for VAT (more on this later) you will need to fill in the VAT registrations forms on the HMRC website. You will then receive a VAT registration number, which you will need to add to any raised invoices and a confirmation certificate.
4. When do I charge VAT on my sales and other supplies?
You begin charging VAT on all sales and invoices from the day you register for VAT.
So, for example, if you register for VAT in April, but do not receive your VAT registration number until May, you would still start charging VAT on goods and services provided from April.
It can take up to 30 days before you receive your VAT registration number and certificate, so within these 30 you will still need to charge standard 20% VAT (2013) onto all invoices raised. Once your VAT number is received you will then need to include your VAT number onto invoices raised within this time.
5. Can I register for VAT even if I am not at the mandatory threshold amount?
Yes, some businesses feel that having a VAT number adds a certain credibility and prestige to their company, so they voluntarily register for VAT.
6. How often is VAT paid?
Every quarter you will need to fill in a VAT form (online only) to HMRC.
7. Flat rate scheme, how does it work?
The flat rate VAT scheme is an incentive provided by the government to help simplify taxes and means you charge VAT on your invoices at 20% (2013) but only pay back HM Revenue and Customs at a lower rate. It is the scheme that is recommended for businesses that have very few VAT chargeable purchases and expenses i.e. don’t buy much stock.
Important notes about the FRS:
- If you estimate that your annual turnover excluding VAT will exceed £150,000 in your first year, you shouldn't join the scheme.
- If your annual turnover exceeds £230,000 of VAT inclusive revenue in subsequent you must come off the scheme.
- Companies on the flat rate scheme are unable to claim back any VAT on purchased goods and expenses for their business. You can however reclaim VAT on capital asset purchases over £2,000, for example a PC. Providing all the capital purchases are on the same receipt such as a PC, printer and scanner you can claim the VAT back on these items. You cannot however buy a PC one month for £1,500 then a printer the next month for £300 and a scanner the month after for £200 and add them together, they must all be on the same receipt.
Like standard VAT, the flat rate scheme still requires you to complete a quarterly VAT return form (online only). You will need to charge the standard VAT rate, currently 20%, (2013) to your invoices, however...rather than accounting for the VAT on every payment, when you do your quarterly report you will only pay a single flat rate percentage on your turnover of each quarter.
The VAT percentage you pay is considerably lower than that of the standard VAT rate, you than keep the difference as your profit. See example below based on a Limited Company specialising in IT:
|Net amount you invoice your client||£5,000|
|VAT charged on top to your client (20%)||£1,000|
|Flat rate VAT 13.5% (this includes a first year discount of 1%)||13.5%|
|VAT to be paid to HMRC - 13.5% of £6,000||£810|
|VAT received from client||£1,000|
|Profit for you i.e. what you get to keep||£190|
For more information on this scheme, visit our Flat Rate VAT Scheme Guide.
8. How do I reclaim VAT on my purchases?
Every quarter (every 3 months) you would fill in your VAT return form (online only) and submit this to HMRC. This must show all your output tax-this is the total VAT your company has charged your customers on products and services which you have provided. You also include the VAT charges you have incurred on purchases for your company such as supplies, equipment, stock etc, this is known as input tax.
HMRC will then review your VAT form and should your outputs exceed inputs, you must then pay the difference to the government, however if your inputs exceed the outputs your company is then entitled to a refund.
If on the Flat Rate Scheme you cannot reclaim on VAT unless you have done a bulk purchase, on one invoice/receipt which at a cost of £2,000 or more – Again, visit our Flat Rate VAT Scheme Guide page for more details.
Hopefully the above information has helped give some clarity on some of the most common questions asked about VAT. For more information or a general chat about your business plans please call us on 0500 234111 / 01442 275767.
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