VAT is a tax on the final consumption of certain goods and services, but is collected at every stage of production and distribution. Most business related goods and services will be subject to VAT, with the standard rate currently set at 20% (although this is set to change from 1 April 2017 – see below for details).
Companies should register for VAT if the value of their taxable supplies in a 12-month period is greater than the annual threshold of £83,000. You will need to pay your VAT bill by the deadline shown on your VAT return. You can only charge VAT if your business is registered for VAT. You will need to pay your VAT bill by the deadline shown on your VAT return. VAT is charged on things like:
- Business sales - for example when you sell goods or services
- Hiring or loaning goods to someone
- Selling business assets
- Items sold to staff - for example canteen meals
- Business goods used for personal reasons
- ‘Non-sales’ like bartering, part-exchange and gifts (‘chargeable gains’)
These are known as ‘taxable supplies’.
- Must charge VAT on their goods or services
- May reclaim any VAT they’ve paid on business-related goods or service
If you’re a VAT-registered business you must report the amount of VAT you’ve charged and the amount of VAT you’ve paid to HMRC. This is done through your VAT Return, which is usually due every three months.
VAT Flat Rate Scheme
The amount of VAT a business pays or claims back from HMRC is usually the difference between the VAT charged by the business to customers and the VAT the business pays on their own purchases. With the Flat Rate Scheme:
- You pay a fixed rate of VAT to HMRC
- You keep the difference between what you charge your customers and pay to HMRC
- You can’t reclaim the VAT on your purchases - except for certain capital assets over £2,000
To join the scheme your VAT turnover must be £150,000 or less (excluding VAT), and you must apply to HMRC.
Changes to the Flat Rate Scheme
From 1 April 2017 there will be some changes to the VAT Flat Rate Scheme. A new category has been introduced for ‘low cost traders’. A low cost trader is defined as a business whose expenditure on goods (not services) is less than 2% of its gross turnover. This cannot include purchases of:
- Capital goods (e.g. new equipment used in a business)
- Food and drink (e.g. employee lunches)
- Vehicles or parts for vehicles (unless running a vehicle hiring business)
If a business spends more than 2% of its turnover, it’s still classified as a low cost trader if the amount spent on goods is less than £1,000 per year.
Businesses who are trading under the VAT threshold of £83,000 may find it more economical to de-register for VAT from 1 April 2017. Those trading over that threshold may want to withdraw from the Flat Rate Scheme from the same date. Seek advice from your accountant on how best to navigate these changes for your business.
If you decide to leave the Flat Rate Scheme then you need to write to HMRC to inform them of your leaving date. HMRC will write back and confirm your leaving date. You’ll also need to bear in mind the following:
- If you’re currently using the Flat Rate Scheme and get paid before 1 April for work you are doing to do after 31 March, then HMRC says you have to account for this as if you were paid afterwards. In other words, you cannot push forward invoices for work that’s going to be completed after the deadline in order to benefit from the Flat Rate Scheme after 1 April.
- Similarly, if you’re receiving a payment for a job that is ongoing after 1 April, you’ll have to allocate part of this payment to the Flat Rate Scheme and the remaining part will need to be accounted for under the new rules.
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