Choosing the Right VAT Scheme for Your Business

Different VAT schemes

There are a number of ways to account for VAT. While standard VAT accounting is used by many firms, small business owners may wish to consider the alternative schemes that are available. Choosing the most suitable option could save you a considerable amount of time and money.

Annual accounting scheme

Under the annual accounting scheme, businesses are only required to submit one VAT return per year. During the year, agreed monthly or quarterly payments are made based on an estimated liability for the year, with a balancing payment due with the return.

The scheme is available for most businesses that expect to have an annual tax-exclusive turnover of not more than £1,350,000. These businesses can join the scheme from the date they register for VAT. A business can leave the scheme voluntarily at any time by writing to HMRC, but it must leave once its annual taxable turnover exceeds £1,600,000.

Scheme advantages

 ✓       Submitting only one VAT return each year (rather than the four required under standard VAT accounting) could save a considerable amount of time and paperwork

✓       It may be easier to manage cashflow as the liability to be paid each month is known and certain

✓       There is an extra month to complete the VAT return and pray any outstanding tax

Potential disadvantages

X        As interim payments are based on the previous year they may be higher than necessary, although it is possible to adjust these if the difference is significant

Cash accounting scheme

The cash accounting scheme enables businesses to account for VAT on the basis of cash received and paid, rather than on tax invoices issued and received. A business can join the scheme if there are reasonable grounds to believe that its annual turnover is not expected to exceed £1,350,000 in the next twelve months.

Scheme advantages

✓       As output tax (VAT charged by the business on its sales) is not due until payment of sales invoices is received, there may be a cashflow advantage. This is particularly beneficial for businesses with slow-paying customers

✓       There is automatic relief for bad debts: if a customer fails to pay then no output tax will be due

Potential disadvantages

X        Input tax (VAT suffered on the goods and services purchased) cannot be recovered until suppliers’ invoices are paid

Flat rate scheme

Under the flat rate scheme, the VAT due is calculated by applying a predetermined flat rate percentage (dictated by the trade sector), to the business turnover of the VAT period. The current trade sector rates range from 4% to 14 5%. There is a further 1% reduction on the normal rates for businesses in their first year of VAT registration On 1 April 2017 the government introduced a new 16.5% rate for businesses with limited costs, such as many labour-only businesses. Following this, those using the flat rate scheme will need to decide if they are a limited cost trader’ – please contact us if you would like assistance with this matter.

The flat rate scheme is only available to businesses that expect their VAT exclusive turnover in the next twelve months to be no more than £150,000 in taxable supplies Businesses must leave the scheme when income in the last twelve months exceeds £230,000, unless this is due to a one-off transaction and income will fall below £191,500 in the following year. A business must also leave the scheme if there are reasonable grounds to believe that total income is likely to exceed £230,000 in the next 30 days.

Scheme advantages

✓       It saves time and simplifies record-keeping by removing the need to work out and record output and input tax when calculating the VAT due to HMRC

✓       The predetermined fixed-rate percentages are lower than the standard VAT rate

Potential disadvantages

X        Turnover needs to be under £150,000

X        Businesses that use the scheme cannot normally recover input tax or VAT on imports or acquisitions

X        The scheme can be complex where a business buys and sells goods and/or services from outside the UK

Other schemes

There are also special schemes for retailers, as it is impractical for most retailers to maintain all the records required of a registered trader. The three standard VAT retail schemes are the Point of Sale Scheme; the Apportionment Scheme, and the Direct Calculation Scheme. For more information and advice on these and the schemes available to certain other trades, please do contact us.

This article is intended as a basic introduction to some of the key VAT schemes. We can advise you on the most suitable option for your business.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

VAT Fuel Scale Charge

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To make accounting for private use of fuel simpler, you can choose to apply the VAT fuel scale charge. This scale charge adds back a fixed sum each VAT period to account for the private use of fuel, making redundant any need to split the mileage between business and private use.

The scale charge for any given vehicle is based upon its CO2 emissions. HMRC update the scale charge table every May, and this years can be found here.

Scale charges only apply to those cars where there is allowed private usage, and when you start using the scale charge, you must use it on all your company’s cars for which there is private use.

Those using the scale charges, should be sure to keep a record of:

  • Number of cars which it is applied to
  • CO2 band of each car (or cylinder capacity if the car is too old for an emissions figure)
  • Details of when cars have been bought and/or sold.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

 

Concerns for small businesses using the VAT flat rate scheme

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From 1 April 2017 HMRC are changing the rules for using the VAT Flat Rate Scheme (FRS). 

In an attempt to wipe out what HMRC has seen as abuse of the flat rate scheme, businesses will now need to determine whether they fall into a “limited cost trader” category, by comparing the percentage of goods they purchase in relation to their turnover. Limited cost traders must use the new 16.5% rate; previously, the rate was entirely dependent on the nature of the trade, the highest of which was set at 14.5%.

However, the Chartered Institute of Taxation (CIOT) has warned that the changes could have a considerable negative effect on many of the 400,000 businesses currently using the flat rate scheme, the majority of which are compliant.

They suggest that new regulations will all but wipe out the original intent of the scheme, which was to simplify VAT for the small trader. The criteria for being a limited cost trader must be reviewed for every VAT quarter, meaning that taxpayers could be remitting different rates in different quarters – hardly a simplification! Tax points and cut-off dates will be crucial in determining status for the scheme but, say the Institute, some will undoubtedly find ways to tweak the figures to avoid falling into the limited cost category. The goal of eradicating abuse of the scheme would therefore seem unrealistic.

The CIOT suggests there could be other ways for HMRC to tackle the problem, such as perhaps making it unavailable to those who register voluntarily, and are calling for them to re-think the proposals. In the meantime they expect that many businesses will opt to go back to the standard VAT scheme rather than wrestle with the complexities of the new regime.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

‘Tis The Season Of Giving – Some Christmas Cheer From The VAT Man

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Here we are again – can ‘yule’ believe it’s that time of year when businesses like to ‘present’ their staff with a reward for all their hard work? Did you know that certain gifts can be tax efficient? The VAT man won’t entirely ‘reindeer’ on your parade.

First off, we have employee gifts. It doesn’t have to be ‘deer’, in fact as long as the value of gifts given to each employee doesn’t exceed £50 (exclusive of VAT) within a 12 month period, then you don’t have to declare output tax. If however, you’re feeling overly generous, and exceed the £50 limit, then you have to declare output VAT on the total amount of those gifts. He’s not a total Grinch though, you will be entitled to reclaim input VAT on the purchase cost. The £50 limit does not include administrative expenses, e.g. postage and packaging, and the offering must meet the gift criteria in order to qualify.

Then we have the Christmas parties. If you decide to ‘wrap’ up 2016 with a Christmas party for employees, you can reclaim VAT on all the costs. If guests are invited along too (since Christmas is a family affair) then you must apportion the VAT reclaimed to reflect this.

And that’s a Christmas Wrap, we hope you have a Happy Holly Day, from all at Green & Co.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Changes to the VAT Flat Rate Scheme

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As announced in the Autumn Statement, there are significant changes ahead for companies using the Flat Rate Scheme (FRS) for VAT. The FRS will continue to run, however many businesses will find it is no longer economical to use.

Under the FRS, a business ignores VAT incurred on purchases when reporting VAT, with the exception of capital items costing over £2,000. The business simply multiplies the gross turnover for the period by a percentage set for that particular trade sector, for example accountancy and legal services are 14.5%.

The government believes many have been abusing the system and so is changing the rules to make it less attractive. From 1st April 2017 a ‘low cost trader’ will be required to use the higher percentage of 16.5%.

Will this affect you? A ‘low cost trader’ is a business whose expenditure on goods is less than 2% of its gross turnover, or if more than 2% of its turnover, the amount spent on goods is less than £1,000 per year (Not including capital items, motor expenses or food and drink for consumption by the business).

Green & Co have a dedicated VAT department who can advise on how the changes may affect you, to speak to one of our team, contact us on 01633 871122.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

 

What is an invoice and what should it include?

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If you sell goods or services to customers, it’s likely that you’ll also have to invoice those customers for the work you’ve done. But what information are you actually required to include on your invoices?

  • You must clearly display the word ‘invoice’
  • A unique identification number
  • Your company name, address and contact information. If you are a limited company, this should be the full company name as it appears on the certificate of incorporation.
  • If you decide to put names of your directors on your invoices, you must include the names of all directors.
  • The company name and address of the customer you’re invoicing
  • A clear description of what you’re charging for
  • The date the goods or service were provided (supply date)
  • The date of the invoice
  • The amount(s) being charged
  • VAT amount if applicable
  • The total amount owed
  • VAT registration number (if applicable)

If both you and the customer are registered for VAT, invoicing is a legal requirement and copies should be kept with your books and records for at least 6 years if you’re a limited company or LLP, and 5 years if you’re a sole trader or partnership.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Bookkeeping Tips for Small Businesses

Businessperson Calculating Tax

If you own your own business or are considering such a move, keeping accurate records not only benefits you for tax compliance, but it could also benefit your business.

Keeping accurate records may:

  • Reduce your accountancy fees
  • make filling in your tax return more straightforward
  • help you with budgeting and cashflow
  • help your business grow with the help of a business loan
  • help ensure you receive the correct Tax Credits

What you need to record:
Records should show all the money coming in and going out of your business, whether it’s cash, cheque or credit card transactions. It’s important to keep your business records entirely separate from your personal records, so it’s recommended that you set up a separate business bank account.

For money coming in, the records you should keep include:

  • payslips
  • invoices
  • till rolls
  • bank statements

For money going out, keep a record of all:

  • receipts
  • purchase invoices
  • cheque stubs
  • motoring expenses
  • credit card statements

Cash books:
All small businesses rely on cash books to help keep track of their business income and outgoings. Cash books can either be paper-based or take the form of computer software such as Excel, Sage, Xero etc. Your accountant will be able to advise you on the most appropriate type of cash book for your specific business.

If you decide to keep your records on the computer, you’ll need to keep a copy of all relevant documents and be able to provide these to HMRC if necessary, especially P45’s, P60’s and any paperwork showing tax has been deducted.

  • Use a ‘petty cash book’ to record all minor business-related cash transactions, and write a short description of each one.
  • Use a ‘cash book’ to record transactions made through your bank account as well as any cash transactions. A cash book will have columns for income and expenses and a separate column for miscellaneous. You may find it helpful to use the same expenses headings as those used on HMRC’s tax return form. You should also include a “drawings” column for any money taken out of the business for personal use.

VAT:
If your turnover of VAT taxable goods or services exceeds the VAT threshold (currently £83,000) you must register for VAT and keep the following records:

  • VAT account: This is a record of VAT charged on sales and VAT paid on purchases, noted under the headings VAT payable and VAT deductible. The VAT account aligns your business records with your VAT return.
  • VAT invoices: These show the VAT you’ve charged and the VAT that has been charged to you.

If you feel like this is too much, or your time would be more valuable spent elsewhere, your accountant may offer a bookkeeping service that deals with this for you. Here at Green & Co our staff are trained on a number of different bookkeeping packages including Sage and Xero. If you would like to speak to one of team regarding this service, please contact us on 01633 871122.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Have HMRC Crossed The Line?

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According to new plans currently being considered by the government, adult colouring books could soon be subject to VAT.

Currently both children’s and adult colouring books are exempt from VAT, however adult colouring and dot to dot books could soon be classed as ‘uncompleted’ books and attract the full 20% VAT.

Adult colouring books have become increasingly popular over the last few years, with more than 3 million being sold in 2015 worth as estimated £20.3m.

HMRC have confirmed that children’s colouring books are entirely free of VAT and they have no plans to change that. However, they plan to meet with publishing representatives to discuss the VAT treatment of adult colouring books.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Correcting VAT Return Errors

Close up of female accountant or banker making calculations

If you notice you have submitted an incorrect VAT return, you can adjust your next return as long as certain conditions are met. The adjustment must be below the reporting threshold, not a deliberate error and for a period within the last 4 years.

You can adjust your next VAT return if the net value of the error is £10,000 or less. You can also adjust up to a maximum of £50,000 if the net error total is up to 1% of the net sales reported in box 6 of your VAT return.

If you are able to amend the next VAT return, you must be sure to keep details of the inaccuracy, such as the date it was discovered, how it happened and the amount of VAT involved.

If the error is above the threshold, was a deliberate error or was for a period more than 4 years ago, this must be disclosed to HMRC using form VAT652. The form can be filled in online, or you can send a letter with the information requested if you prefer.

HMRC will send you a notice advising if the amount you calculated is correct and of any interest or tax you owe as a result. If you do not hear from them within 21 days, it is recommended you contact the VAT Error Correction Team.

HMRC may charge penalties and interest if the error is due to careless or dishonest behaviour, so be sure to tell them in writing about such errors as well as adjusting your VAT return. This could lead to a reduction in the penalty.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.