In this first instalment of our series on VAT (Value Added Tax) schemes we discuss VAT in general before discussing the various schemes that are available to businesses that you may or may not be aware of.
What is Value Added Tax?
Value added tax is a relatively new tax in the UK, it was introduced in 1973 when the UK joined the EU and replaced the purchase tax regime that had been in place since 1940.
Value added tax is levied at prescribed rates on sales of goods or supply of services provided you are VAT registered. It is worth noting that not all sales and supplies attract value added tax.
Below are the current rates:
- 20% standard rate
- 5% reduced rate
- 0% zero rated
- Exempt : Some goods and services are exempt completely from VAT
- Outside the scope of value added tax
Whilst 0% Zero rated, Exempt and Outside the Scope appear to be the same they are not. The differences are very subtle.
0% Zero rated items do incur value added tax it is just at 0%.
Exempt items do not incur VAT but you still include the sale/purchase figures on your return in either box 6/7.
Outside the scope items also do not incur value added tax, however they are not included on your return at all.
See HMRC’s guidance on the different VAT rates for more information on the products the rates apply to https://www.gov.uk/guidance/rates-of-vat-on-different-goods-and-services
Clear as mud? Confused? At Invicta we deal with these transactions regularly and know how they impact your returns and how to make sure it is compliant with current legislation.
There are two types of VAT registration, compulsory and voluntary. Compulsory registration is when your turnover level exceeds the current threshold. Voluntary is when your turnover is below the threshold, but you want to register anyway.
The current threshold has been set at £85,000 and to be register you must have exceeded that amount in the last 12 months. Alternatively, if you believe you are going to exceed the threshold in the next 30 days you must also register.
The caveat to the turnover level is that the £85,000 must be made up of items that incur value added tax. So, if you have any items that are Exempt or Outside the Scope then these should not be included in your turnover calculation.
How is VAT calculated
There are two ways in which your VAT return can be calculated, either on an accruals basis or a cash basis (cash basis applies only if VAT related turnover is below £1.35million)
Accruals basis value added tax means that the VAT is accounted for using the dates on both invoices raised and invoices received regardless of when you get paid or conversely pay for the goods.
Under the cash basis you account for the value added tax on your VAT return once you have received or made payment for the goods or services.
Smaller businesses often prefer to use the cash basis as this is better for cash flow as it tends to mean that you do not pay anything to the VAT office until you have physically received the cash.
This is something Invicta regularly provide guidance on to clients as to what is best for them and their business.
VAT submission deadlines
VAT returns are normally prepared on a quarterly basis, however in some cases the frequency can be either monthly or annually depending on circumstances.
There are consequences for late VAT submissions or payments, first you are recorded as “in default”, and you enter a 12-month surcharge period. If during this 12-month period you have any further late return submissions, you may incur a penalty and the surcharge period restarts for another 12 months. The surcharge period is only extinguished once you go through a whole 12-month period with no late submissions.
How can Invicta help?
Invicta has systems in place to compute your value added tax and make submissions on your behalf.
We act on your behalf, removing the administrative burden associated with return preparations and submissions, ensuring that your returns are submitted on time to avoid any potential penalties and deal with any related correspondence.
Call Invicta Accounting on 01624 672358 or emails us at firstname.lastname@example.org to discuss your requirement.
Visit our website for more information on our other blog articles and keep your eyes peeled for the next instalment in our value added tax series https://www.invicta-accounting.com/blog-post/