If you are a small business and you are wandering if it is worth your while to voluntarily register for VAT to help with the outward perception of being an established and growing business or if you are reaching close to the compulsory £85,000 VAT registration threshold, then read on for your guide on how to make VAT registration work for your small business.
Which VAT scheme is the right one for my business?
There are three VAT schemes available to businesses in the UK.
The Flat Rate Scheme is the scheme which most small businesses start off on and only admits those businesses that do not exceed £150,000 turnover in a given tax year. If a businesses turnover exceeds this amount after registration, a business will be allowed to remain in the scheme but only until annual turnover exceeds a limit of £230,000. When using the flat rate scheme, there is no deduction of any input VAT charged. Instead, the scheme allocates a flat rate to the business based on the industry the business works in, with all rates are lower than the 20% standard rate and set by HMRC. The FA 2017 tax legislation saw the introduction of a fixed percentage of 16.5% for limited cost businesses, for example. The fixed percentage is applied to the VAT inclusive sales figure and charged on all income. However, the business continues to charge VAT to the customer at the normal rates regardless of using the flat rate scheme.
The Cash Accounting Scheme is useful if a business suffers a lot of bad debts or has customers which take a long time to pay. The disadvantage is that you can only claim back VAT on supplies when payment has been made by a supplier, and not before. The main conditions to be met to join the Cash Accounting Scheme is that your annual taxable turnover of the business must not exceed £1.35 million.
For the Annual Accounting Scheme businesses need only submit one VAT return each year whereas the cash accounting and flat rate schemes require a quarterly return submission. This is hugely advantageous if businesses do not want the extra administration during the year and find it difficult to record keep and file VAT returns on time. This problem can be resolved easily by hiring an accountant, like Southside Accounting, who will monitor input VAT and output VAT on an ongoing basis and submit your VAT returns on time. Please contact us to see how we can help. However, with Annual VAT returns, there are more complex rules to consider relating to VAT payments, including when they are paid throughout the VAT period and as the payments are made before the VAT return is completed at the end of the period, the amount is estimated based on the previous year’s VAT liability.
Again, the annual taxable turnover of the business must not exceed £1.35 million but once in the scheme, if annual turnover exceeds this limit you can remain in the Scheme until you exceed a limit of £1.6 million.
Can I start claiming back VAT from the time before VAT registration?
Pre-registration input VAT, in other words the VAT which has been incurred from purchases made by the business, can be recovered under certain circumstances:
1) On goods purchased in the four years prior to registration, provided they are still in use by the business at the date of registration. This covers the purchase of certain fixed assets and items of inventory purchased before the business has registered, or even before it began trading, but relevant invoices must be provided for proof of purchase date.
2) On services purchased in the six months prior to registration. This might include some professional fees for advice in setting up a new business or maybe some leasing costs for machinery hired.
How is VAT calculated?
Output VAT is the total of all VAT charged on sales of goods and services made by the business in a VAT period. This would include the sale of items normally traded by the business and charged at the standard rate and any sales of capital goods on which VAT should be charged.
Input VAT is the total of all VAT charged to the business by its suppliers on goods and services for the VAT period. This could include the purchase of goods for resale, capital items for use in the business, services required by the business such as legal and professional fees and overheads for the business premises.
The business must pay to HMRC the difference between the output VAT and the input VAT. So for a given VAT period, all sales with VAT applied are totalled as are all goods and services used by the business and then the fundamental equation is used below:
Output VAT – Input VAT = VAT payable to HMRC if output VAT is higher than input VAT
Output VAT – Input VAT = business is due a refund if the input VAT is higher than the output VAT, repayable by HMRC
Other instances where VAT can be used by a business
Here we will be looking at VAT on private use, irrecoverable Input VAT and VAT on Private Fuel.
The general rule for VAT on private use is that only the input tax relating to business use of an asset is recoverable if it is used for both private and business use.
The following input VAT is not recoverable:
a) If cars are not used wholly for business purposes. As a result, VAT is not charged if the car is then subsequently sold. However, input tax on accessories fitted after the original purchase is recoverable but only if the accessory is for business purposes. Input tax on repairs and maintenance is fully recoverable.
b) VAT on entertaining, except of overseas customers and of staff.
Let’s look at a working example. RVP Ltd, which is registered for VAT, incurred the following expenditure, including VAT, during the quarter
ended 31 March 2018:
– New car for staff (but for private use): £12,500
– Three new vans (for business only purposes): £25,300
Container lorry (for business only purposes): £22,000
Entertaining of UK customers: £8,200
Entertaining of Employees: £4,000
Looking at how much VAT can be reclaimed from HMRC on the above expenditure in the given period, the VAT element of the purchase of the vans, the container lorry and entertainment of employees the input VAT ca can be claimed. In other words, 20% of the price given above can be claimed back in the quarterly VAT period as shown below, with 20% being the standard rate of VAT currently in the UK:
– Vans (25,300 x 20/120) £4,216
– Lorry (22,000 x 20/120) £3,667
Entertaining employees (4,000 x 20/120) £667
Total input VAT recoverable being £8,550
Finally we will take a look at VAT on private fuel. Input tax on all road fuel purchased by the business is potentially recoverable. There are three options for dealing with this:
a) Reclaim input tax on all fuel purchased. Charge output tax based on either the full cost of the private fuel supplied (This requires detailed mileage records to be kept) or alternatively the output VAT can be calculated using the ‘scale charge’ regime. A scale charge reflects the output VAT in respect of private use. The fuel scale charge is based on the CO2 emissions of the car.
b) Claim input VAT only on the fuel purchased for business journeys. This requires the business to keep detailed mileage records of business and private use. No output tax is charged in respect of private use. In
effect, the private fuel is not brought into the business’s VAT calculations.
c) The final option is not to claim any input tax (Including business input VAT) in respect of fuel purchased by the business. No output VAT is charged. In effect, the fuel is not brought into the business’s VAT calculations.
An example to show how VAT on private fuel works in practice. Oliver is an employee of RVP Ltd. He has the use of a car which is used for both business and private mileage for the current VAT quarter. RVP Ltd pays all the petrol costs in respect of the car, totalling £1,000 (of which 20% is for private mileage). The relevant quarterly scale charge is £450. Both figures are inclusive of VAT.
When trying to work out the input VAT on fuel which is recoverable for business and that relating to personal use, there are a couple of points to consider:
1) What is the VAT effect of the above on RVP Ltd if it uses the quarterly scale charge?
2) What is the VAT effect of the above on RVP Ltd if it charges Oliver for the private fuel?
Looking at each one in turn, for 1), the total output VAT is £75 (450 /120 x 20) and the input VAT is £167 (1,000/120 x 20). Therefore, if Oliver is not charged for the private fuel then RVP Ltd can reclaim input VAT of £167 (1,000/120 x 20) and will have to account for output VAT of £75 (450/120 x 20). The net £72 (£167 – £75) will be reclaimable from HMRC.
Looking at option 2, output VAT is £33 (£1000 x 20% private x 20/120) and the input VAT is £167 (1000/120 x 20) . If Oliver is charged £200 (1,000 x 20%) for the private fuel then RVP Ltd will reclaim input VAT of £167
but will have to account for output VAT on the money received from John of £33 (200 x 20/120) based on the charge to Oliver.
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Written by Shaima Todd.