VAT is the shortened version of value added tax. As the name suggests, VAT is the collection of any time value that is added to goods. Companies typically need to pay value add tax to Her Majesty’s Revenue & Customers, also known as HMRC, when the hire out or sell services or products.
Of course, there are some exceptions to the rule, such as selling outside of the United Kingdom; however, for the majority of companies, VAT must be applied to all sales.
It does not matter if your client is another consumer or company when it comes to VAT. The thing is, as a business, you will be able to reclaim VAT paid on business expenditure if you are VAT registered.
When Should You Register For VAT?
It is mandatory to register for VAT when the company’s earnings pass a certain threshold amount. The threshold amount can vary from year to year, so it is important to check it regularly. When you pass the threshold amount, you will have one month to register. The registration can be completed online. If the company earns less than the set threshold amount, then registering for VAT is an optional feature. There are certain reasons why it may be beneficial to register for VAT.
What Are The Benefits To Registering For VAT?
You Can Reclaim All VAT Paid For Company Purposes
All business supplies, such as desks, computers, utilities and chairs have VAT applied to them. This means that you are required to pay VAT on the supplies at the time of purchase; however, you can reclaim the VAT from the government when filing your taxes at the end of the year.
It Appears Professional
Registering for VAT makes a company appear more professional to clients and other companies. It can also mask the fact that the company’s turnover may be lower than the mandatory VAT threshold amount.
What Are The Drawbacks To Registering For VAT?
You Will Need To Charge More
When you register for VAT you are required to add VAT to all of your prices. This should not make you more expensive than rival companies as the rivals need to add VAT to their goods as well. If you sell to VAT-registered businesses, they will be able to claim the amount back.
You Will Need To Do More Accounting Work
You will need to pass the VAT charged on the goods to the government by submitting VAT returns each quarter.
If you wish to know more then take a look at VAT Global for details on this matter.
Choosing A VAT Scheme
When you have registered your business for VAT, you will be required to use a system to tell the government this. Below are some of the different schemes available:
The Standard VAT Accounting Scheme
The traditional or standard method is to maintain detailed records of all purchases and sales. It can be maintained using a manual log book, or you can utilize accounting software to automatically capture the VAT information. This data is then used to complete the VAT returns on a quarterly basis.
It is essential that you file the VAT return with the HMRC and pay all VAT due. You could receive money back if you had many company expenses and not as many product sales.
Of course, there are various other types of accounting methods that can be used to claim VAT. Below are three more alternatives to the traditional accounting scheme.
The Annual Accounting VAT Scheme
This method is similar to the standard VAT accounting scheme, but you do not fill in returns on a quarterly basis. Instead of using quarterly VAT returns, you will complete a yearly VAT report with payment deadlines. Some companies keep this system for their corporation tax filing as a more convenient option.
When you have completed the VAT return, it is important to begin making quarterly interim payments for the VAT you will owe. This technique is beneficial because it allows you to budget more efficiently as payments are spread over the year; therefore, it is more effective regarding overall cash flow. The one problem is that you could overpay or underpay the HMRC, and you may be required to make a final payment or conduct a refund application. All companies with a yearly turnover in excess of £1.3 million are not allowed to use the annual accounting VAT scheme.
The Flat Rate Scheme
Using the flat rate scheme, you will pay a percentage of the overall turnover as the value added tax. The accurate amount paid will depend on the type of company being operated as different industries present with various flat rates for VAT.
When using this scheme, you will still need to charge VAT on the invoices; however, you do not need to account for the details of VAT on all sales or purchases. It is important to note that only small companies with a yearly income of at most £150,000 are allowed to use the flat rate scheme.
The Cash Accounting Scheme
When using the cash accounting scheme, your business will account for the value added tax made on the date you are paid instead of the date on the invoice. This can be beneficial if your customers are slow to pay because you will not need to add VAT before you have been paid.
Get The VAT Advice
VAT is a simple concept to understand, but there are some drawbacks. It is highly recommended that you consult an accountant when opting for the best VAT scheme.