There is a lot of information about VAT on the web, but some of it may seem confusing or conflicting. I hope my simple VAT guide to a complex tax may be of help.
Q: I run a business – do I have to charge VAT on my sales?
A: If a business’s turnover exceeds £82,000 in any 12 month period it is likely that it ought to be VAT-registered and charging VAT on its income. It is the business’s responsibility to monitor its turnover and register with HM Revenue & Customs if necessary. However, not all income counts towards the turnover limit, for instance you can ignore exempt income (see below for a description of exempt sales).
VAT registration may also be necessary if you know that your income will exceed the limit in the next 30 days (the future test). This may because you have signed a contract for work for instance.
A business can also VAT register voluntarily. This is usually done to reclaim VAT it has incurred.
Finally, a business must VAT register if it receives certain goods and services form overseas worth more than £82,000.
Q: What happens if I don’t register for VAT when I should?
A: In addition to paying VAT from the date a business should have registered, there will be penalties and interest to pay. HM Revenue & Customs may carry out further investigations if they consider that failure to register was more than an innocent error.
Q: Why is paperwork so important in VAT?
A: Since VAT is a transaction-based tax, it is important to have evidence of those transactions.
Q: Are there any benefits to being VAT-registered?
A: Yes, you will usually be able to claim the VAT you incur on expenditure for your business.
Q: Can’t I recover all the VAT I incur?
A: Some VAT is specifically blocked, such as: cars for most businesses and business entertainment. In addition, if a business makes exempt supplies, it is usually unable to recover any VAT it incurs in relation to those supplies. Apart from this, as long as the expenditure is for business (not private) purposes, and the business has supporting documentation to support the claim, most VAT is recoverable from HMRC.
Q: Do I charge VAT on everything?
A: No, some sales such as food, books and children’s clothing are zero-rated, and some activities including certain property rental and sales, insurance and health services are exempt from VAT. In addition, sales to most overseas business purchasers may be treated as VAT-free. The difference between exempt and zero-rated is that there is no block on the recovery of VAT incurred in relation to zero-rated supplies so usually a business making solely or substantially zero-rated supplies will actually receive payments from HMRC.
Q: Are there any short-cuts to accounting for, and paying VAT?
A: There are a number of schemes aimed at simplifying VAT. These range from annual (rather than the more usual quarterly) returns, cash accounting (where you don’t need to pay HMRC until you have been paid) to simplified flat rate schemes whereby you pay over an element of your turnover without the need for further calculations
Q: What if I get it wrong?
A: Unfortunately, as with everything connected to VAT, there are penalties and interest for even innocent errors. If HMRC find an error before you have notified them of it, there can be quite swingeing extra amounts to pay over. If HMRC consider that there is deliberate evasion, and evidence is found, a prison sentence of up to seven years is possible.
Q: What should I do if I am uncertain about what the VAT treatments of my sales are, or when I should register for VAT?
A: Please contact me! Not only can I assist with the technical side, but there is often planning that may be put in place to mitigate the cost of VAT or penalties.