This post has been updated and the new post can be found here: https://www.ihelm-enterprises.co.uk/vat-and-your-business/
This blog post is going to talk about VAT – what the threshold is, the basics of it and how it affects your tax returns. It won’t cover how to use the different VAT codes, go into detail about the different VAT schemes or how to file your VAT return.
What is VAT?
It is value-added tax and it’s charged on pretty much everything you buy within the UK. Most prices will be displayed including VAT, or it will state whether it is excluding VAT. Different products/services can have different rates of VAT. For the consumer, it will only affect you in terms of the price you pay. However, if you are a business, you might have to register for VAT, track the VAT you charge and pay, submit your returns to HMRC on a regular basis, and then pay them the VAT that is owed. The VAT that is charged on your sales does not belong to you – it is a tax that you are collecting on behalf of HMRC.
When do I need to register for VAT?
For the majority of businesses, you won’t need to register for VAT unless your income (your sales) reaches the threshold set by HMRC. The current threshold as of 31/01/2021 is £85,000. It is calculated on a rolling 12-month period, so you need to be aware of what value your sales are at continuously so you can register if you need to. Once you reach the threshold, you will have 30 days after the end of the month in which you reached that threshold, to register with HMRC.
What happens once I register?
As I mentioned in the introduction, there are several different schemes, but the main ones are the Accrual scheme where you would record the VAT for all your sales and purchases as of the invoice date, the Cash VAT scheme where you would record the VAT for all of your sales and purchases as of the date they were paid, and the Flat Rate Scheme which is where the amount of VAT a business pays is a fixed rate and is only based on your sales.
After you are registered, you will receive your VAT registration number from HMRC and you must display this on all your invoices and sales receipts that you issue to your customers, record the VAT on your sales and purchases, add VAT to your prices, file your VAT returns as instructed and pay any VAT due to HMRC, keep digital VAT records and a VAT account.
The amount of VAT you will pay to HMRC each time you submit your VAT return will depend on which scheme you are using and whether you charged more VAT on your sales than you reclaimed on your purchases.
It is advisable that when you register for VAT, you set up a business savings account so that you are holding back 10-15% of the amount you are paid for sales, and you will then be able to pay any VAT you owe to HMRC. This is because the amount of VAT you are paid by your customers doesn’t belong to you, it is money that is owed to HMRC that you are collecting on their behalf. Normally, you would charge your customers 20% VAT which is the standard rate, but you would also have purchases that you have paid VAT on, so by setting aside 10-15% of the amount you are paid for sales, you won’t then be scrambling at the end of each quarter to find the money to pay HMRC as you will have saved at least some of what you may owe to them.
How often you have to file your VAT return and when by will depend upon the scheme you are using and when you registered, usually it is once every quarter and you will have 1 month plus 7 days to file and pay your return. For example, if you had to file a VAT return that covered April to June, you would have until August 7th to file the return and pay any amount due to HMRC.
How do I record the VAT on sales and purchases?
The easiest way to record your VAT and to be able to submit your returns is to use MTD compliant software like QuickBooks Online to help you to track the amount of VAT you owe to HMRC and to submit the return. All VAT returns must be submitted online using MTD compliant software. This will also help you with recording your transactions digitally as you will be able to attach proof of what each transaction is for. You can do this within QBO or use third-party software like AutoEntry to help with entering the information into QBO and storing your digital receipts.
How does VAT affect my self-assessment and corporation tax returns?
As VAT is money you are collecting on behalf of HMRC and it is owed to them, if you are VAT registered the VAT portion of your sales and purchases are not included within your tax returns and are not included in the calculations of how much tax you owe. These figures are actually shown on the balance sheet as money owed to a creditor.
What else do I need to know?
The majority of products and services will have the standard VAT rate charged, but there are also items that are zero-rated or even exempt, which you will need to be aware of. You will also need to be aware of how to record any items that are bought or sold to people who live outside of the UK, as the way they are treated is different – especially now that Brexit has happened. HMRC have many pages about the different VAT rates and how to treat items, so you can read about the different rules on there. However, if you are VAT registered, it is a good idea to have an accountant who can help you to know how to deal with anything that does not follow the standard VAT rules, especially if you are dealing with importing/exporting products with the EU.
While I am a bookkeeper and understand the fundamentals of VAT and how it is to be dealt with, some areas like dealing with importing/exporting products with the EU are quite specialist areas, so I always work closely with a client’s accountant to make sure we are recording the information within the accounts correctly.
If you would like further information on VAT and whether you need to register, feel free to e-mail me.