When the sales turnover of a business reaches the vat
threshold, currently 64,000 pounds per annum until reviewed
in April 2008, then registration for vat is compulsory. If
financially beneficial, businesses can register for vat
prior to sales turnover reaching the vat threshold.
When a business registers for vat it becomes responsible
for charging vat at the correct percentage on every sales
invoice and transfer of goods and services and also
maintaining accurate financial accounting records of the
vat charged hat are subject to vat inspections. If the
sales turnover has breached the vat threshold that business
is liable for the vat on sales even if it has not charged
the customer.
The vat charged to customers is called output tax and the
vat on purchases is called input tax. When a business has
registered for vat in addition to maintaining records of
sales and input tax it must also keep accurate financial
records of purchases and input tax in order to calculate
the vat payment to be made. The amount of vat to be paid
each quarter is the difference between the sales output tax
and the purchases input tax and is paid quarterly to HMRC.
Specific types of business transactions are exempt from vat
such as insurance and loans. If the business only supplies
exempt items then the business cannot register for vat to
reclaim the input tax paid on purchases.
Registering voluntarily for vat when the sales turnover is
below the vat threshold is a financial planning decision
that each small business should consider. There are both
advantages and disadvantages to a voluntary registration
and the timing of the registration may also be a feature to
be taken into account.
The advantages include being able to reclaim the vat input
on purchases which is otherwise lost as a financial cost to
the business. However as a consequence of a voluntary vat
registration that business would also have to charge vat on
all its sales invoices.
If the business has mainly vat registered clients then
charging vat would probably not affect sales volume and has
the advantage of enhanced credibility within the business
community in which it operates. Charging vat to non vat
registered clients such as members of the public would
increase the amount being charged and make the small
business less competitive.
When a business moves from being non vat registered to
being vat registered changes may have to be made to the
bookkeeping records being maintained. Not normally a
problem if accounting or bookkeeping software is being used
provided the financial system employed can fulfil the
enhanced requirements being vat registered.
The accounting requirements of being vat registered require
the business to issue vat invoices which show the name and
address of the business, the vat registration number, sales
invoice date and the vat being charged. An accounting
record must be kept of all sales invoices issued in a
format that permits a subsequent audit check when the
customs and excise visit to conduct an audit check of the
vat records.
In relation to purchase invoices and reclaiming the vat
input tax vat may only be reclaimed on those invoices for
which the business has a vat purchase invoice. A valid vat
purchase invoice contains the vat number of the supplier
who issued the invoice. An accounting record must be kept
of all purchase invoices showing the vat output tax being
reclaimed.
Vat returns are normally required to be prepared on a
quarterly basis and submitting to customs and excise before
the end of the following month. If registered for the
online service vat returns can be filed online. There are
benefits to filing the tax return online in that many
businesses may receive up to 7 days longer than normal to
file the vat return if the vat payment is being made
electronically.
There are penalties for failing to submit the vat tax
return on time and interest may be charged on the
outstanding amount. When a vat return is not submitted on
time an assessment may be raised which has to be paid as a
legal debt until such time as the return is submitted and
the amount due corrected.
It is important to submit the vat return on time even if
there is a problem paying the full amount. Failing to
submit on time brings the business to the attention of the
tax authority that is more likely to inspect and
investigate persistent offenders. A business can be
expected to receive an inspection every three years however
in the worst case scenario of a delinquent vat registered
business the customs and excise could inspect every quarter.
----------------------------------------------------
Terry Cartwright at DIY Accounting provides Accounting
Software that automates the vat return at
http://www.diyaccounting.co.uk/ for self employed business
at http://www.diyaccounting.co.uk/Selfemployed/vat.htm and
small limited companies.
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