Where a business’ turnover exceeds the VAT threshold in a 12 month period, it must register for VAT. The threshold has recently increased from £85,000 to £90,000.
However, if a business temporarily tips over and then it will subsequently trade below the threshold, it should be able to agree with HM Revenue & Customs that it doesn’t need to register. It is important that such action is undertaken quickly.
Businesses can voluntarily register for VAT if their turnover is less.
VAT for B2B companies
Where your customers are businesses, being VAT registered might be an opportunity to claim back VAT suffered on your costs, as the VAT you charge to your customer will be reclaimable by them. Therefore in effect, they are indifferent as to whether VAT is charged.
VAT for B2C companies
The opposite can obviously be said where the customer is a domestic or not VAT registered as ultimately your invoice will be 20% higher than before.
How to register for VAT
Registration is done online, and the VAT number will be issued in due course. Once registered, you must issue VAT invoices/receipts to your customers which amongst other details, will include your VAT registration number.
VAT returns are normally issued every quarter and as part of the registration process you will have selected which month end is preferable. The month end date can be changed if needed.
The return and any liability is due a calendar month and 7 days after the return end date. So for example, a 31 March return would be due 7th May.
Where returns or payments are not made by the due date, penalties and interest charges can be levied.
Should your company become VAT registered?
It is important to give thought to the various options available in how you calculate the VAT return. The most common option is whether you account for VAT on the standard basis or cash accounting.
For the standard basis, VAT is payable at the point at which the invoice is raised, so if you carry very little debtors, then the standard basis should be fine.
However if your customers get 30 days to pay their invoice, then potentially using the cash accounting method might be better. Under cash accounting, the VAT is payable at the point the cash is received.
One of the main differences between the two is that with standard accounting, if a customer doesn’t pay, you won’t get the VAT you previously paid for at least 6 months whereas with cash accounting, if they haven’t paid, then you haven’t suffered the cashflow disadvantage. There is a turnover limit of £1.35m to be in the cash accounting scheme.
Another option is the Flat Rate Scheme (FRS), under the FRS, you pay a fixed amount of your turnover and don’t get to reclaim any VAT suffered (except for capital expenditure). The rate of VAT you pay is dependent on your trade sector. Generally, the main benefit of the scheme was to reduce administration rather than pay less VAT.
How often do you have to complete a VAT return?
Whilst VAT returns are normally generated quarterly, you can elect to prepare them monthly. This option is really helpful where you normally get a repayment, and so getting the repayment monthly helps with your cashflow.
The other option is to join the annual accounting scheme, in which you prepare one VAT return for the entire year. The upside is obviously only having one return to prepare. Payments are due throughout the year based on estimates and so the obvious downsides are that you could end up paying too much too early or worse still, not pay enough and have a larger bill at the end when you come to prepare the return.
Making VAT simple
One of the key messages from us is ensuring you have a good system and experienced help to prepare you for the process and decision making.
If you have a good accounting system, then the VAT return process should be fairly painless as the data will have been captured in the software and the return can be generated. The key is ensuring that the data is prepared timely and also quality checked so that the returns generated are accurate.
Please don’t hesitate to contact us to discuss your VAT position or your accounting systems, we’d be happy to help.
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