Do you need to register your business for VAT and if so what needs to be considered? The short answer is yes, if your business services, sales or supplies exceed the minimum statutory registration limit (currently £85,000) then you need to register for VAT.
You can however register voluntarily even if your turnover is below the statutory threshold limit if there is an advantage in doing so and we would be happy to discuss this with you. You can also watch our video blog on the subject, which can be found here…
VAT registration can be advantageous to you if most of your sales are standard or zero rated and your purchases include VAT. You can then claim back the VAT that you are paying on your purchases. However there are other issues to consider such as business competitiveness. If your customers are unable to reclaim the VAT you charge you will be more competitive if you are not registered and do not have to charge VAT.
There are a number of Special Schemes available to you which can be considered, after consideration of the circumstances of your business. These include:
- Annual Accounting Scheme
- Cash Accounting Scheme
- Flat Rate Scheme
- Schemes for Retailers
Whether you should use any of the special schemes, or whether you should be registered for VAT or not, depends on your individual business circumstances. Brief details of the schemes are given below. If you would like to discuss your needs we are just a call away to help you.
Annual Accounting Scheme
This scheme is aimed at reducing paperwork and helping businesses to manage their cash flow. Under the scheme VAT is paid in either 9 monthly or 3 quarterly instalments. The amount paid is based on the previous year’s liability, or for new businesses, an estimate. Only one VAT return is required, at the end of the year. The final liability is then compared to the instalments paid and a balancing payment or receipt is made or received. However, there is no impact on the detailed VAT records that are required. Businesses that make claims for repayments would not receive monthly or quarterly payments, but one repayment at the end of the year. This scheme is not therefore appropriate for any business that reclaims VAT.
You can use annual accounting if your estimated VAT taxable turnover during the next tax year is not more than £1.35 million. If you are already using annual accounting you can continue to do so until your estimated VAT taxable turnover exceeds £1.6 million.
Flat Rate Scheme
If your VAT taxable turnover is less than £150,000, you could greatly simplify your VAT accounting by using the Flat Rate Scheme. Under the Flat Rate Scheme your VAT payments are calculated as a percentage of your total VAT-inclusive turnover. Although you cannot reclaim VAT on purchases – it is taken into account in calculating the flat rate percentage – the Flat Rate Scheme can reduce the time that you need to spend on accounting for and working out your VAT. Even though you still need to show a VAT amount on each sales invoice, you don’t need to record how much VAT you charge on every sale in your accounts. Nor do you need to record the VAT you pay on every purchase. The Flat Rate scheme essentially assumes that the Vat that you incur on your purchases is at a fixed rate relative to your income. If the VAT on your actual purchases is less than this, then there is a financial advantage to the scheme, in addition to the simplified record keeping. And, if you register for the Flat Rate Scheme in your first year of VAT registration, you can take advantage of a one per cent reduction in your flat rate percentage. The flat rate percentage that is applied varies depending upon the type of business activity you are engaged in.
Once you join the scheme you can stay in it until your total business income is more than £230,000.
The flat rate scheme will not be right for all small businesses, if, for example, you have a high proportion of zero rated or exempt sales, or you usually make VAT reclaims.
Cash Accounting Scheme
Under standard accounting for VAT, you have to pay the VAT on a sales invoice when it is raised and you re claim VAT on a purchase when the debt is incurred. Using the Cash Accounting Scheme, you do not pay the VAT until your customer pays you, but equally you do not reclaim VAT on purchases until you have paid for them. If you regularly make a net VAT re claim this scheme will not be right for you as you will delay your repayments.
There are no real advantages to the cash accounting scheme in terms of record keeping. In fact it is arguably more onerous because, for instance, if you are paid in cash you must, if asked by your customer, endorse the customer’s copy of your sales invoice with the amount and date paid and if you settle an invoice using cash, you must keep a copy of the purchase invoice endorsed with the amount and date paid. Your records must also clearly cross-refer payments received or made by you to the corresponding sales or purchase invoices. You must also make sure that you cross-refer these payments and receipts to evidence such as bank statements, cheque stubs and paying-in slips.
You can use cash accounting if your estimated VAT taxable turnover during the next tax year is not more than £1.35 million. If you are already using cash accounting you can continue to do so until your estimated VAT taxable turnover exceeds £1.6 million.
If you sell to the general public, especially high quantities of relatively inexpensive items, it can be difficult, time-consuming and costly to record the VAT on every individual sale in your accounts. There are several VAT accounting schemes that retailers can use instead of accounting for VAT in the standard way. These can help simplify your retail VAT accounting.
There are a number of different standard retail schemes, or, depending on your business, you may be able to agree a bespoke VAT retail scheme. If your turnover is over certain limits, you can only use a bespoke scheme.