VAT is an acronym for Value Added Tax, and as the name suggests, it refers to any instance where value is added to an item. Companies will typically need to pay VAT to Her Majesty's Revenue and Customs when they hire out or sell services or goods. Of course, there are certain exceptions, such as sales outside of the United Kingdom. However, for the majority of companies, VAT applies to all sales.
It does not matter if the customer is a consumer or another company, VAT needs to be added. It should be noted, however, that as a company you can reclaim any VAT paid on business expenses - as long as the company is VAT registered. For more information on VAT visit to keep up with the latest news.
When Should I Register For VAT?
Companies are required to register for when their incomes pass a specific threshold amount. The threshold amount varies from year to year, so you need to review it. When you pass the threshold, the company has one month to register. Registration can be done online.
If the company earns less than the set threshold amount, VAT registration becomes optional. However, registering for VAT does have several benefits.
What Are the Advantages of VAT Registration?
#1: Reclaiming VAT Paid for Company Purposes
Companies supply items, such as desks, computers, utilities and chairs that have VAT applied to them. You will be required to pay VAT on these products at the purchase; however, the VAT can be reclaimed from the government when filing the company's income tax statements.
#2: It Appears More Professional
Registering for VAT can make your business appear more professional to other companies. It can also disguise the fact that the company's turnover is lower than the necessary VAT threshold amount.
What Are the Disadvantages of VAT Registration?
#1: You Will Need to Charge Customers More
When adding VAT to the products, the prices will increase. However, this does not mean you will become more expensive than rival businesses as they will need to do the same. In addition, if you are selling to companies registered for VAT, they will be able to reclaim the VAT amount.
#2: You Need to Perform More Accounting Duties
When registering for VAT, you will have to pass on the VAT charged to the government submitting quarterly VAT returns. This means more work in the accounting department.
How Do I Go About Choosing A VAT Scheme?
When the company is registered for VAT, you will require a system to inform the government of how much VAT you are being charged and how much you are paying.
#1: The Standard VAT Accounting Method
The traditional VAT accounting scheme is to keep detailed records of all VAT purchases and sales. This can be via a manual log book, or you could opt for accounting software capturing the data automatically. The data is then used to compile the necessary quarterly VAT returns. The returns need to be filed with HMRC and any overdue VAT needs to be paid. You can reclaim money if you have several business expenses and not many sales.
#2: The Annual Accounting VAT Scheme
Another of the VAT accounting methods is the . This scheme is similar to the traditional accounting method; however, the difference is that you do not complete quarterly VAT returns. Instead of quarterly returns, you will file a yearly VAT report with payment deadline. Some companies opt for this scheme keeping the returns date the same filing date their corporate tax filing date.
When the VAT return is completed, you can begin to make quarterly interim payments for the estimated VAT amount owed to the government. This technique allows one to budget more effectively as payments are spread over a year offering better cash flow. Unfortunately, many people find themselves either under-paying or over-paying HMRC, so it might be best to make a final balance payment or application for a refund. Companies with a yearly turnover exceeding £1.3 million cannot using this accounting VAT scheme.
#3: The Flat Rate VAT Scheme
Using the , you will pay a percentage of your overall turnover as VAT. The amount is dependent on the type of company as different industries have varying flat VAT rates. You are still required to charge VAT on sales invoices, but you do not need to account for these details on all sales or purchases. It is important to note that only smaller companies with turnovers of at most £150,000 can use this method. Be sure to check with HMRC to discover if your company is eligible for this VAT scheme.
#4: The Cash Accounting Scheme
Using the , the business accounts for VAT on the date it is paid as compared to the date one files the invoice. This is beneficial if the company has slow-paying customers as you will not need to pay VAT before you have received an income.
Unfortunately, the cash accounting VAT scheme does have some disadvantages. It is not suited to companies purchasing many products on credit. It is not possible to reclaim VAT until the payment is complete. Furthermore, you will need to complete VAT returns each quarter.
Receiving the Correct VAT Advice
VAT is a straightforward concept but there are drawbacks. It is recommended that you speak with an accountant who can help you choose the best VAT scheme for your needs. The various schemes suit different types of companies, so you should consider the size of the business and the customers in the industry. You are required by law to register for VAT once the business passes the VAT threshold amount, and then you need to maintain VAT accounting methods.