VAT returns services and advice

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When must a business register for VAT?

If your annual turnover exceeds the current VAT threshold then you will need to register with HMRC for VAT and complete and submit VAT returns to HMRC, usually quarterly.

Flat rate VAT?

VAT Returns represent a major administrative burden for many business owners, but for small businesses with an annual turnover of £150,000 or less (current figures, may be subject to change) the Flat Rate Scheme may be the best option.

Under the Flat Rate Scheme a business pays a fixed, flat-rate percentage of gross turnover to determine how much VAT it must pay to HMRC quarterly.

Although a small business using the scheme will still charge VAT as normal on all of the ‘supplies’ it makes, and issue VAT receipts to customers in the usual way, the quarterly VAT return should be more straightforward because it only requires the business to calculate its total sales and then apply a flat rate of VAT to the VAT-inclusive value.

Advantages and possible disadvantages of the flat rate VAT Scheme

Although a small business using the scheme will still charge VAT as normal on all of the ‘supplies’ it makes, and issue VAT receipts to customers in the usual way, the quarterly VAT return should be more straightforward because it only requires the business to calculate its total sales and then apply a flat rate of VAT to the VAT-inclusive value.

Another advantage of the flat rate scheme, beyond simplifying the process, for non-flat rate vat returns, of recording VAT inputs (money received) and outputs (transactions where vat has been paid for supplies or services bought) is that the Flat Rate Scheme can also enable some small businesses to increase revenue by paying a lower rate of VAT to HMRC than the rate, currently 20%, to be added to charges to their own customers.

For example, with a restaurant, VAT will be added of 20% to the customer but under the flat rate scheme the restaurant would pay a flat rate which is currently 12.5% for VAT. The restaurant example demonstrates that this may in fact not be such a great advantage. With flat rate VAT, no outputs can be set off against inputs. The restaurant will but lots of products where VAT has been added and cannot set these off. Consequently, with a business that buys a lot of goods or services, the flat rate may in fact not be advantageous.

Different flat rates for different business types and sectors

The rate that businesses use to determine their VAT rate under the Flat Rate Scheme will vary depending on the products and services the business offers (you can find a full list of business sectors, with their respective flat rates of VAT, here).

How does a business register for the VAT Flat Rate Scheme?

In order to apply for the Flat Rate Scheme a business must meet a number of eligibility criteria:

  • It must be a VAT-registered business (either because its turnover exceeds the current £83,000 VAT registration threshold, or because it has opted for voluntary registration)
  • The business’s annual turnover must be £150,000 or less
  • The business must sell products or services that are ‘taxable supplies’ ie they are not exempt from VAT
  • The business must not have left the Flat Rate Scheme during the previous 12 months
  • The business must not be part of a margin or capital goods VAT scheme
  • The business must not be ‘closely associated’ with another company

Assuming they meet the eligibility criteria, small business owners can apply to join the Flat Rate Scheme here.

Separate your VAT amounts received from other monies received

A situation we, as accountants, encounter far too often is where sme clients do not separate VAT monies received from other monies. We always advise clients to set up a separate bank account and to transfer VAT received into that account weekly or monthly at most and to do so with absolute discipline.

Failing to do this can lead to the money which will be due to HMRC being used for general business purposes. Then, when it comes to quarterly VAT payments, there may not be enough funds to pay. HMRC can be very aggressive in pursuing outstanding VAT and delayed payment surcharges can be very expensive. Far better to treat VAT as not your business money, which is the reality, and to put it aside in a separate bank account.

Online VAT and accounts package

If your VAT Returns are relatively simplistic then in certain circumstances it may make sense for you to complete them yourself. We can advise you on whether you should feel comfortable filing your returns on your own.

If you use a bookkeeping software package then more than likely it will have the ability to submit your VAT returns electronically based upon the bookkeeping you have completed.

However, VAT can be a very complex area and sometimes it can be worth outsourcing the completion of your VAT returns to professionals. This is where we come in!

De-register for VAT?

If your business turnover falls below the VAT compulsory threshold you can de-register for VAT with HMRC. We would be happy to advise and assist you with this process.

VAT inspections

Being notified, often with very little notice, of an inspection from HMRC is understandably stressful and fills business owners with dread. At the very least, it creates for at least a day or possibly more while the inspectors are on site. It is imperative to co-operate fully and HMRC has wide powers to look at your business records and paperwork.

It’s also almost certainly true that HMRC inspections and/or investigations are more likely with businesses that are highly cash generative such as any retail business or in the food, drink or leisure industry. Don’t assume that because you are careful in keeping records and always pay VAT on time that you won’t get an inspection.

Many clients who are advised they will get an inspection feel worried and feel less so if they have accountants on board who have prepared the returns but also who can be present when HMRC turn up. As part of our services we can help and also if an inspection turns into an investigation with potential sanctions and enforcement.

VAT problems and pitfalls

Common problematic areas include :-

  • If goods or services are bought for both business and non-business use, the input VAT may be apportioned with only the business element recovered.
  • Entertainment – VAT on business entertainment for third parties (eg customers and suppliers) can never be reclaimed.
  • If the goods are for export, or leave from outside the UK, you should take advice.
  • Discounts – a problematic area because it is easy to calculate and pay VAT to HMRC on the full price and forget that you gave a discount, resulting in less VAT being paid to you. Also, be careful with trade discounts and discounts for quick payments given to customers or clients.
  • Customer bad debts – VAT payable to HMRC is generally due based on when the invoice was submitted not when payment is made and this can create obvious cash flow issues. If a customer defaults and you have already paid the output VAT to HMRC. This issue can be mitigated for smaller business by using an alternative and generally advantageous cash accounting basis scheme where vat returns include only monies received.
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