A guide to VAT for SMEs

December 5th, 2018

According to a survey by the British Chamber of Commerce, two thirds of businesses say that VAT is their biggest administrative burden.

With this is mind, we’ve put together a simple guide to help businesses get to grips with the basics of this rather tricky tax.

What is VAT?
VAT, or Value Added Tax, is a tax charged by VAT-registered businesses on top of their sales for goods and services. The current standard rate of VAT is 20%, however there are some items which attract a reduced rate of 5% such as children’s car seats, and some products are zero rated, such as
books and newspapers.

As well as charging VAT on sales, those registered can reclaim the VAT they’ve paid over on business-related expenses.

Businesses must report their VAT liability to HMRC via a quarterly VAT return, calculating the difference between the VAT amount received on sales and the amount paid out on purchases. The difference is either paid to HMRC or reclaimed from HMRC as a refund.

Do I need to register for VAT?
Your business must register for VAT if your taxable turnover exceeds the registration threshold (currently £85,000) during a 12-month period, or if you expect to go over the threshold in a single 30-day period.

Even if you don’t exceed the threshold, you can register voluntarily if you think it will be advantageous. You may choose to register for a variety of reasons – a VAT number can make your business appear larger and more professional, for example. But remember, you’ll undoubtedly have to take on extra work if you’re VAT registered.

Some businesses cannot register for VAT, namely those who only make VAT exempt supplies such as insurance, finance and gambling.

Flat Rate VAT
Businesses that spend very little on goods can qualify for the Flat Rate VAT Scheme, which simplifies the current two-step VAT process into one. The percentage for each business varies accordingly and full details can be found on HRMC’s website. Those whose goods are less than either 2% of turnover or £1,000 a year are classed as a ‘limited cost business’ and pay a higher fixed rate percentage.

Choose an accounting scheme
Most businesses will submit their VAT return on a quarterly basis using the Standard Accounting Accruals. There are, however a range of other schemes to choose from, such as the Cash Accounting and Annual Accounting Schemes. It would be worthwhile speaking to an advisor to make sure you choose the most efficient scheme for you.

What records should I keep?

Once registered it will be your responsibility to keep accurate VAT records. You’ll need to make sure that you have records of all sales and purchases. You should issue sales invoices to customers – for a VAT invoice to be valid it must include certain details, including a unique invoice number and your company’s VAT number. You must also remember to keep a VAT account so you can keep track of the VAT that is due in and out of your business, in preparation for your VAT return.

Deregistering for VAT
Your business can deregister for VAT if it expects sales to fall below £83,000 over the next 12 months. Certain rules do apply with deregistering your business, such as being liable for VAT on any assets and stock that the business holds.

What is Making Tax Digital?
Currently, businesses are free to keep VAT records however they please, be that online, on spreadsheets, or on paper. However, in a bid to make our tax system more streamlined and reduce administrative errors, the Government has introduced Making Tax Digital (MTD). The digital initiative will require all businesses with a turnover above the VAT threshold to report their VAT figures digitally from April 2019.

Those still using paper records will need to think about switching to an MTD-compatible platform sooner rather than later. Spreadsheets are still allowed under the new legislation, although bridging software will be needed to maintain a digital link.

Speak to one of our advisors about our VAT Services by contacting your local Champion office today.


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