Value added tax or VAT for short, can be a complex and be a burden in regards to the process for many businesses. It is an indirect tax charged by the government on most goods and services. Businesses having a turnover of more than £85,000 ( as of 2023) from vatable goods and services need to register for VAT, and also need to have a vat online account registered with HMRC to be able to remain complaint with MTD for VAT returns. Because of the complex procedures involved in submitting VAT returns, many small businesses struggle with registration for or submitting their VAT returns.
Output VAT is charged on the sale of good or services, and input VAT is reclaimed on purchases and other expenditures made by the business. When a VAT period ends (generally every quarter), the difference between output and input VAT needs be paid to or reclaimed from HMRC.
HOW TO DO A VAT RETURN? IN 3 STEPS
First of all you will need a VAT number as well as a VAT online account. Please be aware that from November 2022 you can only use MTD compliant commercial accounting software like Xero or QuickBooks or through an agent like a professional Accountant and tax advisor like Makes Sense , to submit your VAT returns. You can still use the HMRC Online Account if you use the VAT Annual Accounting Scheme.
THE THREE SCHEMES OF VAT:
There will always be three VAT schemes from which businesses can choose according to what suits them best.( if not changed by HMRC) This decision is very crucial for companies to ensure great cash flow.
Standard VAT Accounting
The standard VAT Accounting scheme also called the Accrual Scheme is where all the VAT is recorded based on when the invoice for sale or payment is issued. VAT returns in this scheme are generally submitted every quarter. It must show the input and output tax for the quarter that has passed.
Flat Rate VAT
HMRC’s flat rate scheme provides incentives for simplifying taxes, allowing businesses to charge 20% VAT on sales but only pay HMRC at a lower rate. For instance, IT contractors have a VAT return of 13.5% in their first year of business and 14.5% after ensuring that contractors generate extra earnings.
Cash Accounting
Businesses that have more than £1.35 million in vatable revenue cannot use the Cash accounting scheme. VAT can’t be claimed on goods bought for the firm that hasn’t been paid yet. The procedure is completed online and must show the input and output VAT for that quarter
SIGNIFICANCE OF AN ACCOUNTANT IN FILING VAT RETURNS
We would recommended all businesses to use an accountant. This way there is less likely to me mistakes when submitting returns and less likely for any investigations from HMRC if you are to make a mistake if you are unsure.
Makes Sense can minimise errors while making sure you remain MTD Complient using efficient software to submit your VAT returns.
VAT PENALTIES CHARGED TO SMALL BUSINESSES:
Companies must submit a VAT return to HMRC even if it is zero or money to reclaim. Submitting VAT returns late you will receive a warning letter or penalty charges from revenue. Businesses must submit VAT returns one month and seven days after their VAT quarter ends. Companies must submit a VAT return to HMRC even if they have no VAT to pay or reclaim. The penalty structure for VAT has changed from 1st Jan 2023, you can read more about HMRC VAT penalties on the HMRC website.
REDUCED VAT:
The UK government introduced a reduced VAT of 5% on specific goods and services related to hotels, hospitality, and holiday accommodation On 15th July 2020. This reduced rate deadline was extended to 30 September 2021. After that, a new reduced rate of 12.5% was announced and will remained until March 2023.
This reduced VAT rate is applicable for selected goods, including nicotine patches, heating and repair services, and efficient materials for homes. There is 0% VAT on certain goods, such as children’s clothing, food, and prescription dispensing.
The main point of this policy was to uplift and protect 2.4 million jobs affected by the COVID-19 lockdown. It was aimed at reopening the economy following the outburst of the coronavirus pandemic.
OUTSOURCING THE VAT RETURN PROCESS FOR YOUR BUSINESS
Outsourcing to Makes Sense Accountants for your VAT returns is a more affordable option for businesses rather than appointing a full time in-house accountant to perform VAT related tasks.
THE ADVANTAGES OF BEING VAT REGISTERED
- Submitting VAT returns online can claim a VAT refund on goods and services bought from other companies.
- You will feel better in yourself as a business that you are keeping accurate records, which will help your business in the long run.
- Firms are given the VAT number. This acts as evidence of the credibility of the business. You can then display this on letterheads, invoices, and stationery. It will give your customers, lenders, investors, and other stakeholders an appearance of a more prominent and established firm. Because they are assuming that the company revenue is more than £85000 due to VAT registration.
- Firms registering for VAT on a voluntary basis can backdate their registration for up to four years to reclaim VAT on their current equipment.
THE DISADVANTAGES OF BEING VAT REGISTERED
- Businesses must maintain records, VAT receipts, and invoices that involve extra administration and paperwork.
- If the output (sales)VAT exceeds the input(purchases/expenses) VAT, businesses might get a large VAT bill from HMRC.
- Some business clients are not VAT registered, meaning they cannot reclaim VAT on goods and services they purchase. Therefore these goods and services are too expensive for customers.
CONCLUSION
VAT regulations vary for businesses selling goods or services,also place of supply and specific industries. Domestic reverse charge in construction industry of which has specific VAT rules can be an issue. Navigating these complex rules can get expensive for businesses if it is not done correctly. Appointing specialist VAT accountants like Makes Sense to submit VAT returncan result in a long term saving in the long term. Outsourcing your finance function can be an extremely favourable option for a new or rapidly growing business, to minimise errors while keeping costs low. Please do not hesitate to contact us at Makes Sense Accountants.