VatVAT and your relation to it

Simply, VAT is a tax imposed by the Government and collected by HM Customs and Excise. The main rate of VAT was until a while ago was 17.5% and is currently 20%. The tax is added to the price that you charge your customers and has probably been added by those who supply you. I say probably because there are some types of goods and services that do not carry VAT and these will be mentioned a little later.

Watch out for deadlines and penalties -Do not fall Foul of the VAT man

The HM Customs and excise are not known for their sympathy and consideration. If you do not fill in your VAT returns honestly you will be called to account. Just about all businesses will receive a visit from the VAT inspector from time to time and there is no way of knowing when until you get the phone call arranging the time for an inspection.
This artlicle aims to help keep you on the right side of the VAT man.

If it is found that you have underpaid your VAT by an appreciable amount this must be paid back immediately. Failure to do so will result in your business being closed there and then and the locks changed. These guys do not mess about. Whilst the Inland revenue will try to give you some time to repay anything that you owe them  the VAT man can be very impatient and he has the power,bylaw, to take what is rightfully his. So beware !

To Register or Not ?

If your business exceeds £70,00 of turnover eligible for VAT (or more) then the decision is made for you. It is a requirement that you must register if your turnover is now above the threshold or if you anticipate that it will be in the next year. But what if your turnover is below the magic figure ? Well you then have a choice you can remain unregistered and save yourself the time and trouble of calculating and paying the due VAT every month or quarter, depending upon how often you decide to pay.

This means that once you register you must either start adding VAT to you previous prices, thus reducing your competitiveness, or pay all or part of it yourself  (reducing or removing your profit but keeping the price to the customer lower than it would have been with all the VAT added).

If you customers are private individuals who can not claim back the VAT the fact that you are not eligible will be of great interest to them. However, if you do business mainly with companies and corporates who can claim back much of the VAT then they probably expect that you are registered. In fact if you are not it could put them off dealing with you.

Some businesses avoid VAT eligibility by splitting the enterprise into different divisions making different individuals responsible for each. As an example an electrical contractor with a small shop may decide that for the husband (in a husband and wife partnership) should be responsible for the contracting and installation work. At the same time his wife then runs the sales of components and appliances in the shop entirely separately..

Provided neither of these two, now distinct businesses, exceed the VAT threshold they will not need to register. If you think that this could help you then ensure that you discuss it with a fully qualified accountant before setting up a structure to achieve this.

So why would anyone register for VAT if there income is below the threshold ? there are several valid reasons:

financial reports

  • To enable you to claim back the VAT on purchases.
  • Because you anticipate that your business will grow and exceed the threshold.
  • Because the type of customers that you deal with expect it.
  • Keeping in line with your competitors

Claiming back VAT

The first reason to register is to claim back the VAT on your purchases. The idea of getting back the VAT that you have paid is quite an attractive one although the thought of having to record every purchase and its VAT component can be daunting to say the least. If you do not purchase many VAT rated items and if you produce only a small number of sales invoices working out your VAT liability each month can be quite straight forward. However if your business purchases a large number of items every month or makes a large number of small sales the task can be a real bind.

Growing into the Threshold

By consulting your business plan you should have an indication of how much your business is going to grow over the next year. If at any point you will exceed the threshold then it is advisable to register for VAT now to avoid complications later.

Meeting Customer Expectations

This is quite a difficult one. If you are dealing with members of the public or other small businesses then the fact that you do not charge VAT will probably be welcomed. It is in fact a saving to anyone who can not claim back VAT or who is on a fixed rate scheme ( more of that later ). If you tend to have customers who are large companies or public sector organisations the fact that you are not VAT registered may be interpreted as indicating that you are small, unstable, inexperienced etc. So it may be that you would register in order to give the impression that you are an established, sizable, reliable company.

Keeping it Simple

To help some businesses the VAT man has introduce a Flat Rate Scheme. This scheme is available to companies who expect that during the coming year their taxable turnover ( not including VAT)  will not not exceed £150,000 and their Total turnover ( not including VAT) will not be more than £ 187,500.

If you are eligible you can undertake to pay a flat rate of interest based on your VAT inclusive turnover and at a percentage rate quoted for your particular industry. This means that you no longer have to record every sale and the VAT amount in order to claim the VAT back. The percentage you pay can be anywhere from 2% to 14.5% and you can find out the rate for your business from a list provided by Customs & Excise on the following Link

http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm#4

It is up to you to decide whether the percentage that you would pay is beneficial or not and even if it is not you must take into account the amount of time and effort that you will save by not having to account for every item an which you paid VAT. I would advise that you chose a couple of months that are typical for your business and compare the amount you would pay under the flat rate scheme with your actual return for that period.

A Word of Warning

You will not win all the time with this scheme. When you lose you will just have to take the long view and bite the bullet. I remember a company that I was helping out who were predominantly a service provider and so they got the appropriate rate. One day along came client who wanted them to supply hardware which was worth close to £100,000. They did this and invoiced the company in the usual way.

All was fine until the VAT return was due and they realised that they could not reclaim the VAT that had been paid at the time of  purchase. They had however to pay their agreed percentage on the turnover including the sale of the equipment. This represented a BIG loss compared to the usual method of claiming all VAT on purchases.

In ths situation they can claim special circumstances but would need to have owned the equipment as a capital asset for some time prior to sale and it would require the help of a proficient accountant.

If you ever face this situation see if you can get the equipment supplier to supply direct to your customer and invoice them for the amount that you would have charged. You do this on condition ( in writing ) that you receive a finders fee for the sale  equaling ( or as close as you can get to) the mark-up you would have made. This one is legal, ethical and works, but you have to do it before the sale takes place.

Conclusion

As you can see VAT is a not a simple or straight forward subject and we will no doubt revisit it many times. It is, however, one that every business must give thought to even before they start to trade. Some small businesses may find that they have to deal with a mix of VAT and Non VAT items which will further complicate matters.

If this is the case I would recommend that you seek expert advise and try to automate as much of the VAT process as you can. This may mean that you will have to buy and master a particular software package but it will pay dividends from the start and if your business grows it will become absolutely vital.

So good luck with your VAT and remember pay it all, pay it on time and stay out of the VAT mans clutches.

Brian Gregory – Set Up and Grow

Other Posts with Relevant Interest      Small Business Tax Penalties

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