Introduction to VAT
VAT is a tax chargeable on taxable supplies made in the UK by taxable persons. Credit is given for tax paid to other businesses and the net balance is payable or reclaimable, normally on a quarterly basis.
A taxable person is a person running a business as:
- An individual
- A partnership
- An unincorporated association, e.g. trust or charity
- A limited company
VAT law covers all types of supply of goods or services (outputs), whether of a revenue or capital nature. Supplies include sale, hire, or loan of goods. Output normally falls into four categories:
- Positive rated - taxable at 20% or reduced rate 5%
- Zero-rated - including socially or economically important items, e.g. exports, most food, books, newspapers, public transport, drugs on prescription, children's clothing
- Exempt supplies - including necessities such as insurance, postage, finance, education, and health
Some receipts are outside the scope of the VAT, e.g. dividends, shares of profit compensation for losses, non-UK supplies
Should I be registered for VAT?
You should notify HM Revenue & Customs when your business turnover for the past twelve months exceeds £85,000 (2018/19). Or where there are reasonable grounds for believing that your turnover for the next 30 days will exceed the threshold. In the first case, notification must be within thirty days of the end of the relevant months. In the latter case, notification must be within thirty days of the date on which grounds first existed.
You can deregister when anticipated turnover for the next year (measured from any time) is less, but this may not be in your interests.
It is important to monitor turnover because there is a penalty for late registration. This is in addition to the tax payable.
Can I register for VAT if my vatable turnover does not exceed the prescribed limits?
You are able to register for VAT even if your business does not exceed £85,000, however, this does not mean that it will be necessarily beneficial. It’s a good idea to discuss this with your accountant who can help you make a decision based on your personal circumstances.
Cash accounting scheme
There is a special scheme applicable to businesses where taxable turnover is expected to be not more than £1.35 million in the next 12 months. This allows the trader to account for VAT on the basis of payments received and made rather than on tax invoices issued and received. It may be advantageous to use cash accounting from the date of registration, although some businesses will not benefit from this scheme.
Special schemes of accounting for VAT are available to retailers. There are three different schemes on offer, and you can join the schemes at the beginning of every VAT period. The three different schemes are as follows:
- Point of sale scheme: you identify and record VAT as and when the sale takes place.
- Apportionment scheme: you buy goods for resale.
- Direct calculation scheme: You make a small portion of your sales at one VAT rate and the majority at another rate.
Again, it is advised that you seek the help and advice of an accountant before deciding to join any of these schemes on offer
Credit for input tax
Input tax paid on purchases can be recovered by registered taxable persons, who are able to offset input tax against their output tax liabilities. Traders with fully exempt outputs cannot register or reclaim any input tax. Credit is available for all VAT paid on inputs where a VAT invoice is available, except for the tax on private expenditure, business entertainment, motor cars, certain building materials, and goods bought under a second-hand goods scheme. Recovery of input tax may be restricted if the business makes both taxable and exempt supplies.
How often will I have to complete a VAT return?
Every quarter, a return is issued and must be submitted to HM Revenue & Customs no later than thirty days from the end of the quarter. Make returns and payments on time because extensive legislation exists to levy penalties on defaulters. Businesses with regular repayments may make monthly returns. Those using the Annual Accounting Scheme need make only one return per year, which has to be submitted two months after the end of the scheme year.
Can I file my VAT return online?
You can send your VAT return online here. The gov.co.uk website will have a guide, should you need assistance when filing your return. Remember that you must deregister when taxable supplies are no longer made, for example, when trading ceases.
Specific rules are laid down as to the form and content of tax invoices. These are to ensure that all the necessary information is recorded for the determination of the rate of tax to be applied, the liability of the supplier to account for the output tax due on the supply, and the entitlement of the recipient to reclaim all or any of it as input tax.
There is no requirement to issue a tax invoice for a zero-rated or exempt supply. However, it would seem appropriate to issue some form of invoice for either type of supply to establish that VAT is not chargeable on it. Copies of all tax invoices issued and received must be retained for at least six years unless a shorter period (normally at least three years) is agreed with HM Revenue & Customs.
A tax invoice is required to show the following:
- An identifying number
- The date of the supply and the date of issue of invoice
- The name, address, and registration number of the supplier
- The name and address of the person to whom the goods and services are supplied
- A description that is adequate for the purposes of identifying the goods or services supplied
- For each description the quantity of the goods or the extent or nature of the services, a unit price, the rate of tax, and the amount payable, excluding tax
- The total amount payable excluding tax
- The rate of any cash discount offered
- The total VAT payable
Anyone supplying goods or services directly to the public does not have to supply a tax invoice unless the customer requires one. Where the tax-inclusive value of supply is not more than £250, the supplier may issue a simplified form of invoice giving only the following details:
- Name, address and registration number of the retailer
- Date of supply
- A description, adequate to identify the goods or services supplied
- The total amount payable including tax
- The rate of tax at the time of the supply
Paying your VAT
Your VAT bill will need to be paid by your deadline which is shown on your VAT return. There are two different returns based on whether you are using the Annual Accounting Scheme or payments on account.
You can pay on the same or next day if you are using online or telephone banking. You need to allow three working days if you are using a direct debit, Bacs, standing order, online by debit or corporate credit card or at your bank or building society.