Businesses become liable for vat when sales reach the vat threshold set on 1st April 2007 at 64,000 pounds 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 pounds 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 for your business
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 with automated vat calculations from the basic data entry of sales and purchases on excel spreadsheets.
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 pounds p.a. businesses that have adopted a vat flat rate scheme pay vat at a percentage of sales rather than the difference between vat on sales and vat on purchases. The exact percentage paid is 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. The flat rate calculation can be automated by 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 1.25 million pounds. 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 1.35 million pounds that can be extended for existing users to a turnover of 1.6 million pounds 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.