You must register for VAT with HMRC if your business turnover has exceeded the VAT registration threshold of £90,000 in the last 12 months or is predicted to do so in the next 30 days. Under MTD (making tax digital), VAT registered businesses are required to electronically submit their quarterly VAT returns to HMRC. You will need MTD compatible accounting software for this. The current VAT rate is 20%.
As a VAT registered business, you can get back the VAT you paid on goods and services used in running your business. This is input VAT. VAT registered businesses are required to charge output VAT on the sale of goods and services. While input VAT is reclaimed from HMRC, output VAT is paid to HMRC. Typically, input VAT is subtracted from output VAT and the remaining amount is paid to HMRC when the VAT return is produced and filed with HMRC. When input VAT is higher than output VAT, a business is in a VAT repayment position. In such instances, HMRC should reimburse the VAT to the business.
The following example is a simple illustration of how VAT works. Assume you spend £100 on raw materials with input VAT of £20, taking the final cost to £120. You use the raw materials to create your product which you in turn sell for £200. Output VAT of £40 is added to the selling price, increasing the price the customer pays to £240. The VAT return will consist of output tax of £40 less input tax of £20, resulting in a VAT payment of £20 due to HMRC.
VAT schemes
There are VAT schemes that simplify VAT for businesses and are voluntary to join. With a standard VAT registration, VAT is paid and reclaimed based on invoice dates rather than when cash is paid or received on invoices. Furthermore, VAT returns are submitted electronically every 3 months to HMRC. Three other VAT schemes are that are available for small businesses are :
Flat rate scheme
Cash accounting scheme
Annual accounting scheme
The flat rate scheme allows you to calculate your VAT owing as a percentage of your gross turnover. The scheme is available to small businesses with an annual taxable turnover of £150,00 or less. Under this scheme, you do not have to keep detailed records of your sales and invoices, as you pay a fixed rate of VAT that is lower than the standard VAT rate. You cannot reclaim the VAT on your purchases, except for certain capital assets over £2,000. You retain the difference between the VAT that you charge customers and the lower fixed rate that you pay to HMRC.
The cash accounting scheme is particularly helpful if cash flow is variable. The scheme is available if the annual VAT taxable turnover of a business is £1.35 million or less. You pay VAT to HMRC once your customer has paid you, rather than based on the date the customer was invoiced. You can only claim VAT on your purchases once you have paid the supplier you purchased the goods from.
Again, the annual accounting scheme is available if the annual VAT taxable turnover is £1.35 million or less. You only need to complete one VAT return a year, saving on administrative time. You pay instalments of the estimated annual VAT bill, avoiding a large bill at the end of the year. If you overpay you can apply for a refund but only once a year!
HMRC links:
Register for VAT: When to register for VAT – GOV.UK (www.gov.uk)