What is the threshold to register your business for VAT
You must register with HMRC for VAT if your business turnover or sales have exceeded the VAT registration threshold of £90,000 in the last 12 months or you predict they will do so in the next 30 days. Under Making Tax Digital (MTD), HMRC requires VAT registered businesses to submit their quarterly VAT returns electronically. You’ll need MTD compliant accounting software to do this. The current VAT rate is 20%.
VAT types and rates
Input VAT
One of the benefits of a VAT registered business is the ability to reclaim the VAT on purchases made for running the business. VAT on purchases is termed input VAT, and a business declares and reclaims this on the VAT return.
Output VAT
A VAT registered business must charge VAT on the sale of goods and services, which is termed output VAT. The business declares and pays this tax to HMRC on the VAT return. Typically, the business deducts input VAT from output VAT and pays the balance to HMRC. Sometimes a business finds itself in a repayment position, when input VAT exceeds output VAT. This may occur if a business has cyclical sales and experiences periods where production input is high and sales are low. When HMRC owes a business VAT, they will reimburse the VAT to the business.
The following is a simple example of how VAT works:
- The cost of raw materials is £100 plus VAT of £20, making a total of £120
- Using the raw materials, a product is created which sells for £200 plus £40 VAT, and the customer pays a total of £240 for the item
- On the VAT return the output VAT is £40 and the input VAT £20.
- The input VAT of £20 is deducted from the output VAT of £20, leaving VAT of £20 owing to HMRC.
VAT rates
There are a number of different VAT percentage rates that apply to different goods and services. There is the standard VAT rate of 20%, a reduced rate of 5% and a zero rate. Exempt goods and services, and items outside the scope of VAT, do not incur VAT.
VAT Schemes
There are a number of VAT schemes that businesses can opt to use to help them manage their cash flow, administration etc. The most popular schemes for small businesses are the following:
Flat rate scheme
The flat rate scheme allows you to calculate your VAT owing as a percentage of your gross turnover. The scheme is available to small businesses with an annual taxable turnover of £150,00 or less. Under this scheme, you do not have to keep detailed records of your sales and invoices, as you pay a fixed rate of VAT that is lower than the standard VAT rate. You cannot reclaim the VAT on your purchases, except for certain capital assets over £2,000. You retain the difference between the VAT that you charge customers and the lower fixed rate that you pay to HMRC.
Cash accounting scheme
The cash accounting scheme is particularly helpful if cash flow is variable. The scheme is available when the annual VAT taxable turnover of a business is £1.35 million or less. You pay VAT to HMRC when your customer pays you, instead of paying VAT based on the date the customer is invoiced. You can only claim VAT on your purchases after you have paid the supplier who provided the goods to you.
Annual accounting scheme
Again, the annual accounting scheme is available if the VAT annual taxable turnover is £1.35 million or less. You only need to complete one VAT return a year, saving on administrative time. You pay instalments of the estimated annual VAT bill, avoiding a large bill at the end of the year. If you overpay, you can apply for a refund but only once a year.
