Chartered Certified VAT Accountants in London

What is Value-added tax (VAT)

Value-added tax (VAT) is a consumption tax that's charged on goods that have had value added at each stage of the supply chain. It is the end user that ultimately pays the VAT but a business is responsible for collecting this on behalf of the goverment.

VAT can become complicated very quickly. This is demonstrated by the long running dispute between Mcvitie's, who manufactured Jaffa Cakes and HMRC.

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What is Value-added tax (VAT)

Value-added tax (VAT) is a consumption tax. This means it is charged on goods/services at each stage of the supply chain. It is the end user that ultimately pays the VAT but a VAT registered business is responsible for collecting this on behalf of the goverment. As a VAT registered business, you must do the following:

Charge VAT

You must charge your customers VAT when you sell goods/or services to them

Deduct VAT

Each time you buy goods/services you can deduct VAT you have been charged by your suppliers

Pay VAT

Every 3 months, you pay the difference over to HMRC (or claim it back if there's a refund)

When do you have to register

Most businesses with annual sales of £85,000 or more have to register for VAT. And even if your sales are below that level, you can register on a voluntary basis.

30 day test

If you believe your VAT taxable turnover will exceed £85,000 during the next 30 days, you need to register by the end of that month and start charging VAT from the 1st of the next month.

Preceding 12 months test

Where you have a VAT taxable turnover of over £85,000 in the immediately preceding 12 months, you have to register by the end of the next month - and start charging by the 1st day of the second month after you went over the limit. This is a rolling 12-month period.

Voluntary basis

There are two main reasons that businesses do this:
1) People believe that they appear bigger or more successful if they're VAT registered.
2) If most of your customers are themselves VAT-registered, then the VAT you charge isn't a real cost to them, and you can benefit from reclaiming VAT incurred on your own purchases.

What rates should I charge

Most business charge VAT at 20%. However, It is not always clear because the rules can become complicated. Here is an example:

VAT Accountant London

Jaffa cakes

Is a Jaffa cake a biscuit or a cake?

VAT Accountant London

What was the issue

The rate of VAT on food is normally 0% but there are exceptions. In this particular instance:

  • The rate of VAT on cakes is 0
  • The rate of VAT on biscuits is 20%.

VAT Accountant London

The arguments and decision

  • McVitie's were of the view the ingredients were the same as a traditional sponge cake and sponge was a substantial part of the Jaffa Cakes
  • HMRC argued they were really biscuits covered with chocolate.
  • The court in the end agreed with McVitie's

0%

Zero-rate (0%) applies mainly to everyday items, like basic foods, children's clothing, books and newspapers etc

5%

The reduced rate of 5% applies to domestic gas and electricity, and to supplies in the construction industry, such as certain building renovations and alterations. It also applies to some energy-saving materials installed in residential properties, to child car seats and some mobility aids.

20%

The standard rate of 20% applies to most goods and services.

Exempt

This is where no VAT is charged, but the business supplying it cannot reclaim any VAT they incur in respect of such supplies. This includes items such as postal services and health services.

Option for small businesses

Clearly VAT is a burden on a business. The goverment recognise this and offer small companies various options to reduce this burden. It is essential you look at these options but remember to perform a cost/benefit analysis depending on the nature of your business.

Cash accounting scheme

If your customers pay immediately, but you purchase on credit, then the cash basis would suit you well. From a timing viewpoint, you would be reclaiming VAT on your purchases earlier. If, on the other hand, your customers typically take a while to pay, while you settle your supplier invoices quickly, then the invoice basis may be better.

Flat-rate scheme

You pay a fixed rate of VAT to HMRC (depending on your business type), you keep the difference between what you charge your customers and pay to HMRC and you cannot reclaim the VAT on your purchases - except for certain capital assets over £2,000

Annual accounting scheme

With the Annual Accounting Scheme you make advance VAT payments towards your VAT bill (based on your last return or estimated if you're new to VAT) and you submit 1 VAT Return a year.

What can I claim VAT back on

Different types of businesses charge VAT at different rates and this means when you are buying goods and/or services, you reclaim at the rate and amount shown on the invoice. You may find that you cannot reclaim VAT on some of your largest expenses such as rent and insurance premiums. You need to look at the purchase invoice to work out what can you claim vat back on. You can only claim the amount of VAT as described on the invoice.

In addition, you can only recover input VAT in the furtherance of your business, that is, on expenses for a business purpose. An example of expenditure not for business would be personal expenditure or entertainment. So, for example, if you are taking out clients for a meal, you cannot reclaim the input VAT on this. Or, if you purchase a TV for your home, this is non-business related and input VAT cannot be claimed. There are several tax traps to be aware of so contact us for a free non-obligation chat.

How to calculate VAT

You need to calculate your VAT position on a 3-month basis. This is best done using accounting software such as Sage or Xero. These software packages allow you to seamlessly send and receive invoices and have inbuilt ability to calculate your VAT position.
You will also be able to send an invoice to your customers. This will break down your sales income and output VAT. In addition, this acts as proof to HMRC, and your customer will use this invoice to reclaim input VAT. You also use the software to capture details of purchase invoices. It is imperative to input data into the system that matches the invoice (you cannot claim input VAT on pro-forma invoices). Once you have entered this information, you select your VAT period, and the software will calculate your VAT position and prepare the relevant tax form. Once you're happy, you can submit your VAT return to HMRC using the accounting software.

When is VAT due

For most small businesses, VAT must be calculated every 3 months and reported 1 month and 7 days after the period end. So, for example, if your VAT quarter end is 31 March 2021, you will need to submit your VAT return by 7 May 2021. The payment must be made on the same day i.e., 7 May 2021 unless you have a direct debit in place in which case the payment will be deducted on 12 May 2021.

It is good practise to align the accounting year end to the VAT quarter end.

How to pay VAT

The simplest way is to set up a direct debit and 12 days after the VAT return due date, the money is debited from your account. By way of an example, If you VAT return quarter end is 31 March, you need to submit the VAT return by 7 May. The payment is taken out on or around the 12th.

What are the VAT record keeping requirements

You can keep VAT records on paper, electronically or as part of a software program (such as book-keeping software). Records must be accurate, complete and readable.You must keep VAT records for at least 6 years. If you've lost a VAT invoice or it is damaged and no longer readable, ask the supplier for a duplicate (marked 'duplicate'). HMRC can visit your business to inspect your record keeping and charge you a penalty if your records are not in order.

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I made a mistake on a previous VAT return

You can simply make a correction on your next VAT return If:

  • the error is less then £10k, or
  • 1% of your box 6 figure (up to a maximum of £50,000).

If the error is larger then it must be reported to HMRC on form VAT652 or you can contact the VAT error team directly. Contact us for VAT advice if you have an issue before contacting HMRC.

HMRC have sent a VAT notice of assessment of tax

This happens if you do not submit a VAT return to HMRC and don't pay on time. The best thing to do is bring your VAT affairs up to date by submitting a VAT return and making the payments. Any surcharges/penalties arising can then be appealed and if there is a reasonable excuse, they be reduced to NIL. Contact us to discuss your personal situation.

How we can help you

As you can see, VAT is a lot more complicated than just buying cloud accounting software and following the steps. The software providers take no responsibility in the accuracy of your returns or classifications. We are experts in small business VAT and have years of experience helping clients out of trouble and keeping compliant.We will ensure you never miss a deadline and will keep your records digitally so that an HMRC investigation will run smoothly.

Decide whether or not you should register voluntarily

Run a 'health-check' of your systems if you're already VAT-registered

Make sure you've considered any of the applicable special VAT schemes.