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.
Because the scheme assumes a certain amount of VAT that could be reclaimed on costs this scheme was very popular with service type businesses, contractors and businesses run from home, who had very little VAT to reclaim, and consequently obtained a financial advantage from the scheme. This lead to a lot of voluntary VAT registrations by businesses that were under the registration threshold. From April 2017 HMRC introduced the concept of the “Limited Cost Trader” to combat this.
A limited cost trader is defined as one whose VAT inclusive expenditure on goods is either:
- less than 2% of their VAT inclusive turnover in a prescribed accounting period
- greater than 2% of their VAT inclusive turnover but less than £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000)
Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:
- capital expenditure (goods which are bought to be used in the business over a period of time (for example, longer than a year). Examples include equipment such as a computer or mobile phone.
- food or drink for consumption by the flat rate business or its employees
- vehicles, vehicle parts and fuel (except where the business is one that carries out transport services – for example a taxi business – and uses its own or a leased vehicle to carry out those services)
The definition of goods above excludes most of the typical types of expenditure that a small service business might incur. But the measure also unfairly targets services businesses who might incur more than 2% of turnover on expenditure on services (such as IT costs) rather than goods. If you are not selling a product, you are not likely to have to purchase much in the way of goods.
Limited cost traders have to use a flat rate of 16.5% which results in the amount of VAT being payable to HMRC being almost as much as the VAT that the business charges its customers. As a consequence businesses that voluntarily registered for VAT have de-registered and some have changed to the more complicated standard scheme.
The 2% criteria is assessed in each quarter, so it is possible that in one quarter you could be a limited cost trader and have to use a flat rate of 16.5%, then the next quarter you could meet the 2% threshold and be able to use the lower flat rate appropriate to your business. This adds complexity to what is meant to be a simplification scheme.
Limited cost traders still get the first year 1% discount, so it can be beneficial to use the flat rate in the first year and then either change to the standard scheme or de-register.
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. If everything you buy and sell is subject to the same rate of VAT then this is less of an issue, but retailers will often sell a mix of products that are subject to different rates of VAT. To use standard VAT accounting it would be necessary to record, at the point of sale, the VAT rate for each product sold, which is not possible without sophisticated tills. There are several VAT accounting schemes that retailers can use instead of accounting for VAT in the standard way or 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. These can help simplify your retail VAT accounting.
If you are selling online then a retail scheme is less likely to be relevant, even though you are a retailer, because the nature of online sales is such that your systems will record what you have sold on a line by line basis and should therefore be capable of determining the correct VAT treatment of every sale. It is HMRC’s expectation that an online business would not need to use a retail scheme.
There are 3 retails schemes:
The Point of Sale scheme
This relies on having a point of sale system that can identify the correct VAT rate for each sale, but without the necessity of recording this on an item by item basis. You just need the system to be able to tell you what the total value of your sales are for each VAT rate. If you know you have sold £1,200 of standard rate goods in the day then simply divide the sale value by 6 and you will determine that the VAT you need to account for on that day’s sales is £200. This is essentially standard VAT accounting but without the detail of the transaction by transaction recording at point of sale.
The Apportionment Scheme
This scheme can be used if you buy goods for resale (not services, or goods made yourself, or catering services). Your annual turnover must be less than £1m, although there is another scheme for businesses with an annual turnover of between £1m and £130m.
This scheme is based on determining the value of goods purchased by each VAT rate. This should not be too problematic as your purchase invoices will indicate the amount of VAT on each purchase. Once you know the value of purchases for each VAT rate you then determine what percentage of total purchases each rate represents. If 40% of your purchases are standard rated then it is assumed that 40% of your sales are standard rated. Once you have applied 40% to your total sales, which are say £10,000 then £4,000 of sales are standard rated and if you divided £4,000 by 6 you will determine the value of sales VAT at standard rate that you need to account for.
If you don’t mark up all your products by the same percentage then this will result in a different amount of VAT being accounted for compared to the Point of Sale Scheme, which could be favourable or unfavourable depending on how your products are marked up.
If you annual turnover is more than £1m but less than £130m then you calculate the expected selling price (“ESP”) of standard and reduced rated goods then work out the ratio of these to the ESP of all goods received. This works on a rolling 12 month period and can be complex to operate.
You will need to document your calculation of ESPs and HMRC does not prescribe how you should make these calculations, except to say it must be realistic and as accurate as possible. Most commonly the methods employed will be:
- mark up each line of goods – this is the most accurate method
- mark up classes of goods – for example vegetables or confectionery (but only if you can’t use (a))
- use recommended retail prices (RRP) – if you sell at RRP
Realistically therefore option (a) is going to be the method most likely used.
The Direct Calculation Scheme
Again your annual turnover must be less than £1m. This scheme is relevant if you make the majority of your sales at one VAT rate. You determine the ESP for the minority or majority of your goods. However care needs to be taken to determine ESPs and it becomes more complex if the goods you sell are subject to more than 2 different rates of VAT.
Once you have determined the ESP of either your minority or minority sales you can determine the value of the other as the difference between total sales and the value of minority or majority sales calculated. You can then divide standard rated sales by 6 to determine the value of standard rated VAT to account for.
If your annual turnover is more than £1m then you must also make an annual adjustment which reflect goods actually sold, adjusting for movements in stock levels.
If you are unable to use any of the above schemes or your turnover is more than £130m you will need to use a bespoke scheme, tailored to meet your business needs, but nevertheless based on one or more of the above schemes. The overriding aim will be to agree a method that is affair and reasonable.
There is more details information on all of the retail schemes on the Gov.UK website: