Value Added Tax Registration.
Businesses become liable for value added tax when sales
reach the vat threshold set on 1st April 2007 at £64,000
p.a. regardless of whether that business has registered for
vat purposes. Businesses whose customers are vat registered
should consider opting for voluntary vat registration as
sales would not be affected by vat registration and
registering would permit that business to also reclaim vat
input tax on purchases. Businesses with mainly non vat
registered customers may wish to delay vat registration
until the point is reached at which liability to vat tax
becomes inevitable. Consideration should be given to
maintaining sales below the vat threshold provided this
does not result in a significant loss of profit. When the
vat threshold of £64,000 p.a. is exceeded Customs & Excise
should be advised. It may be possible to delay vat
registration if sales breached the vat threshold due to an
abnormal sales period that may not necessarily be repeated
in the foreseeable future. Having reached the point of vat
registration consideration should be given to the various
vat schemes which are available to either simplify the vat
calculation or smooth the vat tax liability.
Choose the right vat scheme.
Unless a vat scheme is adopted then the standard inputs and
outputs vat scheme would be applied. This involves charging
all customers vat on sales known as output vat and paying
this amount to the Vat office each quarter. Vat Registered
businesses can also deduct from the vat liability the input
vat on purchases that suppliers have charged the business.
It is important to ensure all sales and purchase invoices
are retained and an audit trail from the individual
transactions to the vat tax liability is maintained as
Customs & Excise do inspect vat records, the frequency of
those visits, often once every three years can increase
dramatically if the vat records are considered inadequate.
Accounting Software can provide a solution to record
keeping and DIY Accounting produce automated vat
calculations from the basic data entry of sales and
purchases on excel spreadsheets.
Vat Schemes
Vat Flat Rate Scheme
The vat flat rate scheme can be adopted by businesses that
have an annual turnover excluding vat of under £150,000
p.a. Instead of paying the difference between vat on sales
and vat on purchases businesses that have adopted a vat
flat rate scheme pay vat at a percentage of sales in line
with the average for that trade sector. Vat is not
reclaimable on purchases under the flat rate scheme. The
Customs & Excise website contains details of the vat flat
rate percentages for each sector. Customers are charged vat
at the normal vat rate, 17.5% if standard rated goods. The
actual vat payable is then calculated at the appropriate
percentage of the total sales figure including vat. An
adjustment to the accounts would then be required to adjust
for the difference between the vat paid and the amount
payable if an inputs and outputs basis had been used. DIY
Accounting software automates this flat rate calculation by
automatically calculating the vat on sales at the flat rate
and expensing the vat input to the purchase accounts.
Businesses in their first year of vat registration also
receive a 1% reduction in the vat flat rate for their trade
sector which can save tax.
Annual Vat Accounting Scheme
Not suitable if you receive repayments of vat, the annual
accounting scheme is based upon an annual estimate of the
vat bill which is then paid in monthly or quarterly
instalments throughout the year with the balance payable or
received at the end of the year when the annual vat return
has been submitted. The vat threshold for this scheme is
businesses with a sales turnover not expected to exceed
£1.25m. The main benefit of the annual accounting scheme is
to smooth the vat payments over the year.
Vat Cash Accounting Scheme
Under the vat cash accounting scheme the vat return and
liability to pay vat is based upon the date sales were
received and the date purchases were paid rather than the
invoice tax points. The vat threshold for the cash
accounting scheme is businesses with a sales turnover
excluding vat of under £1.35m.which can be extended for
existing users to a turnover of £1.6m and left in place for
up to 6 months after the vat threshold has been breached.
Accounting for vat using the Cash Accounting Scheme may
require businesses to record sales and purchases on cash
received and paid basis and adjust accounting records for
accruals. Alternatively, sales and purchases can be entered
into the Accounting records based upon the invoice tax
points and a quarterly adjustment made for debtors and
creditors at the beginning and end of each quarter. Such
accounting adjustments would not be suitable for everyone.
Vat Retail Schemes
Retailers selling to the general public may not easily be
able to produce vat sales invoices to individual customers
and there are various vat retail schemes available on the
Customs & Excise website that retailers can adopt. The main
benefits of the vat retail schemes are to dispense with
every customer being issued a vat invoice unless requested.
Vat retail schemes can be used in conjunction with both
flat rate schemes and the annual vat accounting scheme.
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Terry Cartwright provides automated VAT Accounting Software
at http://www.diyaccounting.co.uk/index.htm
VAT Accounting Software for Self employed at:
http://www.diyaccounting.co.uk/selfemployed/vat.htm
