Value Added Tax (VAT) is a tax collected on the sale of your goods or services and relinquished on the purchasing of the goods or services that will be used in your business. The administration of VAT in the UK is now managed by HM Revenue and Custom.
Should my company be VAT registered ?
VAT registration is only compulsory once the turnover of your company exceeds or is likely to exceed the government threshold of £81,000 (2014-2015) for any rolling 12 month period. You can register for VAT on a voluntary basis at any point up until when your company’s turnover exceeds the above mentioned threshold. There are essentially a number of considerations to take into account when deciding whether or not to register for VAT.
You can voluntarily register for VAT at anytime before you reach the threshold. Many new businesses who expect to turnover more than £81,000 per year choose to register before they commence trading, this means that they are not burdened with the administrative work associated with changing their accounting system and re-pricing their products and services later down the line. Many new businesses also invest a large proportion of their income and capital in establishing the company in the early stages, the advantage of being VAT registered from the onset means that the VAT paid on these expenses can be reclaimed.
What are the rates of VAT ?
It is important firstly to remember that VAT is a tax that is calculated on the sale of the items you buy and sell through your business. There are various rates of tax for different types of products and services. The standard rate for which most items apply is 20%, this means if you sell a product or service to a customer they must pay an additional 20% on the sale price. In the same respect if you buy a product from a VAT registered business, 20% of the sale price will be calculated as VAT. Here are the main rates of VAT in the UK :
How and when do I pay or receive VAT from the HMRC ?
Most companies pay their VAT on a quarterly basis to the HMRC. It is important to remember however that any VAT collected through your company must be accounted for separately from that of your normal sales revenue. The VAT you collect is not yours or your company’s money, rather it is being looked after temporarily until you make your next payment to the HMRC.
At the end of each VAT quarter a company must complete a VAT return form that is sent back to the Revenue with the appropriate payment. The VAT return includes a series of boxes where you can input the total of the VAT collected on your sales and the VAT you are reclaiming on your purchases along with several other boxes for sales and purchases made in EC Member States. You can also now complete your VAT return online and pay by direct debit.
How do I account for VAT?
VAT is accounted for at the point of sale not when the funds change hands (Unless you are using the Cash Accounting Scheme). For example if you provide a 30 day credit facility for a customer purchasing a product or service from your company then ordinarily once the invoice has been raised your company will take on a liability to the Revenue for the VAT amount of the sale.
What is the Cash Accounting Scheme?
The Cash Accounting Scheme is a system for managing VAT that can be used by companies with a turnover below £1.35m. Essentially Cash accounting enables you to calculate VAT on the basis of when the funds have been paid rather than the point at which an invoice is raised. This accounting system is particularly useful for companies that typical have a long period of time between when they issue the sales invoice to when they receive payment.
Important VAT Requirements
When your company becomes VAT registered you must comply with the VAT regulations that affect your business. It is beyond the scope of this guide to provide a full analysis of the VAT regulations that affect a given business however here are a few of the key requirements:
How do I register my company for VAT?
You can register your company for VAT by completing a VAT 1 registration form obtainable from HM Revenue and Customs. The VAT 1 form must be completed in full and returned to the Revenue, there is no cost for registering your company for VAT. If you are registering on a voluntary basis then you must show intent to trade, the Revenue will normally request invoices that have been paid by the company as proof that you are applying for legitimate purposes.