VAT is an often misunderstood tax and clients often ask questions about it. Hopefully this post will dispel some of the myths and make clear how it works.
What is VAT?
VAT is Value Added Tax. It is a tax that’s charged on most goods and services that registered businesses provide in the UK.
For the purposes of this post we won’t explore the complexities when trading outside of the UK but we are happy to advise on this if you use the Contact Us link.
Who charges VAT?
VAT can only be charged by a registered business. A registered business is an individual, a partnership, a company, club, association or charity.
If your turnover is below the threshold then you do not have to register but you can voluntarily decide to register if it is to the benefit of your business. Once your turnover is over the threshold (currently £85,000 per year) you must register.
How much is VAT?
There are three rates:
- standard – 20%
- reduced – 5%
- zero – 0%
Goods and services charged at a standard, reduced or zero rate are ‘taxable supplies’. Even though a zero rated item doesn’t have VAT charged on it it is still a taxable supply at a rate of zero.
Most goods are standard rates. The reduced rate applies to children’s car seats, domestic supplies of fuel and power and products to help with quitting smoking.
A zero rate is applied to most basic food items, books and magazines, children’s clothing and shoes, and travel by public transport.
Rates on different goods and services – GOV.UK
– via www.hmrc.gov.uk
You charge your customers at the correct rate for the goods or services you provide. There are some goods and services where you cannot charge VAT. These may be exempt or outside the scope. These are not ‘taxable supplies’. These include items such as insurance, bank charges and postage stamps.
How does VAT work?
The VAT you charge your customers on your sales is your ‘output tax’.
The VAT you have paid on your purchases and expenses to make your taxable supplies is your ‘input tax’.
Take away your input tax from your output tax. You then either send a payment to HMRC or claim a repayment from HMRC.
Output tax £1,500 – Input tax £1,000 – Pay £500 to HMRC
Output tax £1,000 – Input tax £1,500 – Claim £500 from HMRC
To help you remember which is output and input tax consider how the goods are moving. Sales go out of your business and purchases come into your business. Therefore sales incur output tax and purchases incur input tax.
What is my taxable turnover?
VAT taxable turnover is the total value of everything you sell that isn’t exempt from or outside the scope of VAT.
If all of your goods and services are exempt, you will not be allowed to register.
Calculate taxable turnover – GOV.UK
– via www.hmrc.gov.uk
When must you register?
You will need to register if, at the end of a calendar month, your taxable turnover has gone over the registration threshold during the previous 12 months or less.
You should also register if you expect your taxable turnover, in the next 30 days alone, to go over the registration threshold.
Register within 30 days of going over or expecting to go over the threshold. If you don’t register on time, you’ll still need to pay the VAT due from when you should have registered. HMRC may also charge you a penalty. Don’t let this happen to you, it’s a waste of your money.
Every registered business has to charge their customers VAT, at the correct rate, for the goods and services they supply.
Remember, when you are registered, you can claim back the VAT you have paid to make your taxable supplies.
When to register – GOV.UK
– via www.hmrc.gov.uk
How do I register?
The quickest and easiest way to register is to use HMRC’s online services here.
After you register, HMRC will send you your registration certificate and details of when your (usually quarterly) returns are due.
Some businesses may need to cancel their registration for a variety of reasons. This is beyond the scope of this post but we are happy to advise. Please Contact Us for more information.
What are exempt supplies?
No VAT is charged on exempt items. Don’t include sales of exempt goods or services when you are working out if you need to register for VAT. They do not form part of your taxable turnover.
Once you register, you must keep a record of all the exempt items you sell and include these in your VAT return.
Remember, if your business only provides exempt goods or services, you will not be allowed to register.
Some examples of exempt supplies are:
- financial and insurance services
- betting, gaming and lotteries
- most services of doctors and dentists
Exempt supplies and zero-rated supplies are very different.
Zero-rated goods are taxable supplies and are included in your ‘taxable turnover’. You can claim back VAT you have paid to provide zero-rated goods and services.
Exempt goods are not taxable supplies and are not included in your ‘taxable turnover’. You can’t usually claim back VAT you have paid to provide exempt goods and services.
Once you are registered, when you make a sale you must give your customer a VAT invoice. Included in this invoice must be your VAT registration number, a tax date, a description of the goods or services supplied and the amounts net, tax and gross (i.e. before tax and after tax).If your customer is registered they need this document to be able to reclaim the VAT you’ve charged them.
All registered businesses must by law keep their records for a minimum of 6 years. HMRC may wish to see these documents at any time. Electronic records are now acceptable so paper copies do not need to be kept. However they must be accessible in the event of an HMRC inspection.
– via www.hmrc.gov.uk
UK Value Added Tax can be a minefield but using a professional accountant or bookkeeper can take away the headache and ensure that you comply with HMRC’s regulations. Penalties for non-compliance are severe.
Please contact us if you need more information.
Well all of a sudden we are in March and the tax year is almost over!
That means that people like me will be nagging people like you for your paperwork and books for the tax year so that we can finalise your accounts and/or self assessment return.
The tax year finishes on 5th April 2018 and from that point self assesssment returns can be submitted at any time through to the deadline on 31st January 2019. That seems like a very long time but those weeks and months will soon fly by. If you don’t know how much tax you need to pay by the deadline you could be very unpleasantly surprised by a large tax bill.
The easiest way to avoid this scenario is to get your paperwork and records to your bookkeeper or accountant as soon after the year end as possible. They can then produce your self assessment tax return and you will know, many months in advance, how much tax you have to pay (or are having refunded if applicable).
Get your paperwork together while it’s fresh in your mind and it will take a huge weight off your mind when you hand it all over to a professional to deal with!
Making Tax Digital (or MTD) is a government initiative first announced in 2015 and is designed to simplify the way businesses report their financials to HMRC.
- No more self assessment tax returns
- Records must be kept digitally
- Real time tax position available online
- Quarterly summary report
- Must be submitted through accounting software
- Sole traders, partnerships and landlords with a turnover above the VAT threshold (£85,000) will be the first to join the scheme
Originally meant to roll out in April 2018 the government have extended the timescale so that quarterly filing won’t start until after 2020 and only VAT registered businesses will have to keep digital records from April 2019.
Currently only covering sole traders and partnerships, it is expected in time to cover limited companies too. Sole trader or partnership income must be in excess of £10,000 per year. This means it affects hundreds of thousands of small businesses.
A summary report will need to be submitted from your accounting software each quarter. It will give a breakdown of your income and expenditure by category e.g. travel, advertising etc. Reports can be made more often than quarterly if you wish.
Following the year end date an End of Year declaration will be made within 9 months from the year end.
VAT registered businesses can combine their VAT and summary figures in one submission.
We are lucky to work with such a lovely set of clients and have occasionally thought it could help them with their businesses for us to highlight them to our other clients and blog readers. We are therefore going to be creating a client spotlight post on a regular basis to introduce you to our client base.
I met earlier this week with Claire Wakely, who runs Weave & Wood Interiors in Ilminster.
Claire has been in the soft furnishings and interiors field for many years. Just a few years ago she decided to open up a retail outlet to showcase her skills and talents, along with the beautiful fabrics and many other products that she can supply. Having made a great success of this she now has a larger showroom and is an official stockist of Little Greene paint and paper. These beautiful products are luxurious and long lasting and will help make your home a unique and beautiful place to be. Click here for Little Greene’s website.
Claire’s services include custom made to measure curtains, roller blinds, pelmets and cushions. These are bespoke products, made to your specification with fabric chosen from her huge selection of sample books. My own mother has had her living and dining room curtains made and hung by Claire and is delighted with the product and service she received. There is surely no better recommendation than a whole host of satisfied and repeat customers.
Weave & Wood stock Romo fabrics and these are my personal favourite. Click here for Romo’s website.
Claire’s showroom in Silver Street, Ilminster, is a treasure trove of unusual and exciting home decor. I cannot help but want to buy most of her stock and cannot refrain from touching the luxurious fabrics, throws and cushions. From kitchens to lighting, throws and cushions, candlesticks to furniture; if you are looking for something you won’t find on the High Street you can’t go wrong with Weave & Wood.
We have worked with Claire for 6 years and cannot recommend Weave & Wood highly enough. Click here for Weave & Wood’s website.
Becoming self employed is a dream for many people but there are a few things you need to know before you embark on the exciting journey of being your own boss.
You may need to think about the business structure that you need. Thousands of people begin as sole traders and this does suit most start-up businesses but it may be worth asking advice from a trusted business advisor to make sure that this is the best structure for your business. If you are going into business with one or more other people you can set up a partnership or a limited liability company, both of which come with pros and cons of their own.
Regardless of the of business structure you choose you will need to register yourself as being in business. It may be as simple as filling in an online form with HMRC or could be slightly more complex depending on your requirements. If you are in any doubt at all you need to speak to someone who can impartially advise you about the process.
You must check if there are legal requirements for your type of business. Do you need a licence or a permit or some type of insurance? Being self employed is not just a case of beginning trading!
Where will you work? Can you run your business from home or do you need an office or storage space? If you’re to be manufacturing goods do you need a factory or processing plant? If you rent or buy a business property you will need to register for and pay business rates, although you may qualify for a discount.
Will your business just be you or will you need others to help you? If you’re a cottage industry, chances are you will manage on your own, at least to begin with. But if you’re manufacturing or offering certain types of service you may well need staff. If you employee those staff, then you must offer them a workplace pension and pay employers national insurance contributions on their behalf. A payroll will need to be run so that your staff are paid correctly and on time.
Do you need finance to help you with your business idea? If so you will probably be asked by your bank to write a business plan. We can help with that. You may also need to put money in yourself to fund the business.
When you run a business, you have a legal requirements to keep records of the financial transactions that your business undertakes. This may be as simple as an invoice book and a pile of purchase receipts or you may need a cashbook (analogue or digital) to log your transactions. Alternatively, you may decide to use an online software provider. As the HMRC Making Tax Digital Initiative gathers pace you may find that the latter option is the only one that will work long term.
In conclusion, there are many things that you may have to discuss or decide upon when you start a business. It’s imperative that you get these things right so that you don’t have problems down the line when business has picked up. Any reliable business advisor will be able to help you through the minefield and be there to support you with any decisions you need to make.
It is impossible to provide comprehensive advice on a blog post but we are happy to discuss your business (at no charge!) and give our input on how to set up your dream.
Let us help you to succeed.
For a small business owner trying to choose a piece of accountancy software can be a minefield of Googling, mixed reviews, baffling terminology and an array of information that cannot be easily understood, analysed or assessed.
Most accountancy practices and bookkeepers will have their favoured software but how do you know which suits your particular business?
The first thing to consider is that you will need, in the not too distant future, to comply with the HMRC MTD (Making Tax Digital) requirements. Although in some ways these are not yet totally clear, some aspects are obvious and include accurate record keeping and storage of data in a way that can be easily shown to HMRC, your accountant, bookkeeper, bank or other interested party.
Returns will be submitted quarterly rather than annually and so it will be ever more important to be in control of the information about your business.
We recommend the use of a cloud based software provider as it allows access to you as the business owner from anywhere with internet at any time but also makes the transfer of information from you to your clients, and you to your bookkeeper or accountant, seamless and quick.
QuickBooks is an internationally recognised product which fully complies with HMRC requirements, both now and also when MTD is fully implemented. We are able to provide training in all aspects of QuickBooks so that you can fully utilise all of its features. There are also many add-ons that work with QuickBooks to make the running of your business easier.
Contact us for more information about software choices and QuickBooks.
Today we became certified QuickBooks Pro Advisors so can now offer support to those using QuickBooks as well as Xero, Sage, Excel and many other accounting software possibilities.
From 13 January 2018 HMRC will no longer be accepting payments made from personal credit cards.
HMRC is only allowed to accept credit card payments on the basis that there is no cost to the public purse, and the EU Payment Services Directive 2, which comes into effect on this date, prohibits merchants (including HMRC) from recharging associated fees back to customers.
Corporate, business and commercial credit cards are not affected by this change and HMRC will continue to accept personal and commercial debit cards.
Customers will continue to have alternative payment options including:
Details of ways to pay self assessment can be found on GOV.UK https://www.gov.uk/pay-self-assessment-tax-bill