VAT for small businesses

10th September 2016

What is VAT?

VAT, or Value Added Tax, is a tax that is charged on most goods and services that VAT registered businesses provide in the UK.

Unlike other taxes, VAT is collected on behalf of HMRC by registered businesses. Once you’re registered for VAT, you must charge the applicable rate of VAT on any services you provide, or products you sell.

There are three VAT rates currently – the standard rate (20%), a reduced rate (5%), and zero rate. Some items are completely exempt from VAT.

If your business turns over more than £82,000 over a 12 month period (or if you expect to turnover that amount over the next 30 days), then you will need to register for VAT.

Even if you fall below the VAT threshold, there may be bene ts of registering voluntarily – it may be that in your industry, being VAT registered adds a more professional touch, or if you make a lot of purchases, you may be able to reclaim the value of VAT on these items.

Each quarter, all businesses that are VAT registered must account for all the VAT they have charged to others, or paid out to suppliers and since 1 April 2012, all businesses are now required to submit their VAT returns online.

VAT Schemes

When you become VAT registered you’ll be assigned
to Standard VAT Accounting; however, there are other schemes available, depending on your business’ turnover.

It may be bene cial to use one of these schemes, depending on the speci c circumstances of your business.

Standard VAT Accounting

What is it?

This is the default scheme you will be assigned to unless you state otherwise, it is known as the Standard VAT scheme.

On this scheme you are able to reclaim VAT at the point an invoice is received from your supplier, for example, before you’ve actually paid the money. You’ll also be liable for the VAT on sales at the point you send an invoice to your customer, (even before you’ve received the money from them). This means if a customer doesn’t pay the money, you’ll need to account for the ‘bad debt’, once the invoice has been outstanding for six months.

Flat Rate Scheme

What is it?

The Flat Rate Scheme is designed to help small businesses reduce the amount of time they spend accounting for VAT. Using this scheme you don’t have to calculate the VAT on each and every transaction.

Instead, you simply pay a at rate percentage of your turnover as VAT.

Who is eligible?

You can apply to HMRC to use this scheme if your VAT taxable turnover (excluding VAT) is less than £150K.

What are the advantages of this scheme?

• Record keeping is easier with fewer rules to follow
• You can be con dent of how much you will need to pay

The percentage is less than the standard VAT rate because it takes into account the fact that you’re not reclaiming VAT on your purchases. There’s a range of at rate percentages; the one you use depends on your trade sector. HMRC will advise you of the rate applicable to your business when you register.

Cash Accounting Scheme

What is it?

Usually VAT is payable when an invoice is issued. Using the Cash Accounting Scheme, you don’t need to pay VAT until your customer has paid you, but, you will also need to consider that you can’t reclaim VAT on your purchases until you have paid for them.

Who is eligible?

You can use this scheme if your estimated VAT taxable turnover is not more than £1.35m.

What are the advantages of this scheme?

  • It’s good for cash ow especially if your customers are slow to pay
  • It’s even more useful if you have bad debts
  • You don’t pay the VAT if your customer never pays you

Annual Accounting Scheme

What is it?

Using this scheme, you pay the VAT owed throughout the year in nine monthly or three quarterly instalments. These instalments are based on the VAT you paid in the previous year. If

you have been trading for less than a year, the instalments are based on an estimate of your VAT liability.

Who is eligible?

You can use this scheme if your estimated VAT taxable turnover is not more than £1.35m.

What are the advantages of this scheme?

• Less paperwork involved because you only need to complete one annual return

• It can make it easier to manage your cash ow

• You can make additional payments as and when you wish

Sage on VAT

We know that VAT can be a pain point for many small businesses and one that can cause much confusion and sometimes keep you awake at night, but it doesn’t have to.

At Sage we’re here to help take some of that pain away, whether that’s worrying about whether you need to be VAT registered or wondering how it all works we’re here to support you through it.

All of our accounts so ware is designed to help you manage, process and submit VAT quickly and easily, giving you more time to focus on your business.

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