One of the key considerations for most businesses is to decide whether to register for VAT or not. Registration for some businesses is compulsory once they meet certain thresholds stipulated by the tax authority, however there are some benefits for voluntary registration for those business under the thresholds. Below is a detailed discussion on understanding the basics of VAT.
What is VAT?
VAT (Value Added Tax) is a tax on sales of goods and services, and it is added to invoices you charge to your clients or customers if you are VAT-registered, however not all goods or services attract VAT.
What are the VAT rates?
In both the UK and IOM, there are 3 rates:
- 20% standard rate on most goods & services
- 5% reduced rates on some goods & services, e.g. fuel, energy, children’s car seats, etc.
- 0% zero rate on items such as most foods, books, children’s clothes, public transport, etc..
Therefore, when invoicing customers, you must add on top of the price, a VAT charge which is calculated by applying the relevant rate above x the price.
Some goods and services are exempt completely from VAT, e.g. insurance, financial transactions, property transactions, and most services provided by doctors and dentists.
How is VAT due calculated and paid to the tax authorities?
A VAT return has to be completed and submitted to HMRC or IOM tax office on a periodic basis (refer to the VAT periods discussed below) if you are VAT registered. This would include VAT charges reflected on all sales invoices raised to customers during that period, and then deducting from this the VAT charged to you on purchase invoices from your suppliers. If you paid more VAT to suppliers than you charge to your customers, you have the benefit of a refund from HMRC or IOM tax office, but you will owe them if the reverse is true.
Nonetheless, it’s important to keep all invoices in order to simplify and smooth out the process of VAT returns submissions.
Who should register for VAT?
You are required to register if your sales exceeded £85,000 in the last 12 months, or if you expect to exceed that threshold in the next 30 days. However, if you only sell goods or services that are classed as VAT-exempt (as discussed above), you will not be able to register for VAT which also means you will not be able to reclaim any VAT on purchases.
You are allowed to register for VAT voluntarily if your turnover is below £85,000. This has an advantage of you being able to reclaim VAT on your business purchases and expenses, especially so if you are a zero-rated supplier. For example, if you sell books, classed as zero-rated, you are still able to reclaim VAT on, say, bookshelves you buy which include a 20% standard VAT rate.
Therefore, any type of business (whether a sole trader, LLP, or company) can register as it might also be seen by potential customers or suppliers as being more professional.
What are the periods and deadlines for submitting VAT returns?
In most cases, VAT returns are prepared on a quarterly basis. Which means if you register on the quarterly scheme starting January 1st, you will need to submit a return each 3-month period ending March, June, September and December. There are however a few cases where VAT periods are monthly or yearly.
The deadlines for both VAT return submissions and VAT payments to HMRC or IOM tax office is 1 month and 7 days after the end of the VAT period. So, if you are completing a VAT return for the quarter ending June, you must submit the VAT return by the 7th August.
For any late VAT submissions or payments, HMRC usually record you as “in default”, and enter you into a 12-month surcharge period (a “probation” as it were). If during this 12-month period you have any further late return submissions, you may incur a penalty and the surcharge period reset for another 12 months.
What can Invicta Accounting do for you?
Invicta has systems in place to compute your VAT and make submissions on your behalf to HMRC or IOM tax office. We make you use to online platforms such as QuickBooks which enable us to submit VAT returns for you swiftly through HMRC’s newly introduced MTD (“Making Tax Digital”) resource. More information on MTD can be found on our website at the following links:
We will act on your behalf, removing the administrative burden associated with VAT return preparations and submissions, ensuring that your returns are submitted on time in order to avoid any potential penalties.
Call Invicta Accounting on 01624 672358 or emails us at firstname.lastname@example.org for assistance.