If you are not VAT registered, then you shouldn’t need to worry about this section, unless of course you are approaching a level of revenue where you will be required to become VAT registered. Or maybe you are considering changing scheme or applying for a voluntary VAT registration?
Once you have chosen the VAT scheme you want you can’t chop and change as it suits you, any request to change scheme will have to be processed and approved by HMRC, so it is best to choose the best scheme from as early as possible.
What is expected of you as a VAT registered entity:
1) To charge VAT on all taxable sales (unless you are on a different scheme or have any VAT exempt sales)
2) To have a valid VAT receipt for all expenses you are claiming VAT on
3) To file and pay your VAT Returns timely, late payment and submission may incur a penalty charge
Important Dates for VAT Returns
You have 30 days from the period end of your VAT Return to file this with HMRC
You have an additional 7 days to make a payment to HMRC for the VAT Return (12 if you are on Direct Debit)
Say your VAT Quarter is Mar – May
This covers the period of the 1st Mar – 31st May
You will need to file your Return by the 30th June
You will need to issue payment for your Return by the 7th July
Some points to think about
Not many people enjoy paying tax or VAT, but paying tax is not such a bad thing. Usually a tax liability will arise if you’re selling more than you’re buying. Think about it this way:
- Corporation Tax: This is due on your profits for the financial year (before Dividends)
- Value Added Tax: This is due when your VAT sales income outweighs your VAT expenses
So paying tax is more positive than many people initially think. The trick is to retain as much of the money you accumulate as possible and put aside a buffer for HMRC’s share. Try to put aside the VAT element from any sales (in a separate bank account if possible) so that when your VAT period is due you are less likely to encounter cash flow difficulties or penalties with HMRC.
This is of course easier said than done; however if you are priced correctly and controlling your costs this should be easier to manage. Preferably start putting aside cash sooner rather than later, as the earlier you start to do this the easier it will be to maintain in the future.
In order to plan ahead and manage your accounts it can be useful to understand the more commonly used Schemes to account for your VAT liability.
This is where you pay output tax and receive input tax based on the date of which an invoice is issued, regardless of whether the invoice has been paid or not.
If you have invoiced a customer in March but don’t receive the money until July, you still pay tax in the March VAT period.
Best ways to manage the accrual scheme:
If you carefully manage the dates of your invoices received and the date you send them you can control which VAT quarter it falls in to. However, this does not mean you can simply change the dates of your invoices so they suit you, the minute you issue an invoice or receive a bill the date of the invoice on the document is the one you must use.
The best thing to do is to find every missing invoice: we usually avoid posting any payments until there is a valid receipt for them, however where there are a lot of payments without invoices we may post those transactions as a Payment On Account, this will have no VAT on it and will clearly highlight a missing invoice to look for.
Why do we do this? This is so you aren’t claiming VAT without documented evidence, so if HMRC audit you there should not be any problems. It does not mean you can’t ever claim the VAT though, in posting the payments as a payment on account we can detect any missing VAT receipts, meaning once they are found it could potentially reduce your VAT liability, even if it requires filing as a late claim.
This is where your pay output tax and receive input tax based on when an invoice is paid, regardless of the date on the invoice.
If you have invoiced a customer in March but don’t receive the money until July, you won’t pay the tax until the July VAT period.
Best ways to manage the cash scheme:
Try to keep payments controlled around the end of a VAT quarter, naturally you can’t control when a customer is going to pay you but you may be able to pay off some of your suppliers towards the end of the period, providing you have the cash to do so.
So which is the better option?
This depends entirely on the nature of your business and credit terms you have with customers and suppliers. It also depends on the size of your invoice values, although on either scheme you will still be required to pay exactly the same amount of VAT the only true difference between these two schemes is the timing of when VAT it is to be paid or reclaimed.
If you have long credit terms and high value invoices on your sales it may be preferable to choose a cash scheme, this is because you can defer the VAT payments to the point of which you physically receive the money in order to pay the liability.
If your invoices are instead paid at point of sale then it would be preferable to have the accrual scheme – this means that you can reclaim the VAT on any bills as soon as possible to offset the VAT on your sales.
What other schemes are available?
Flat Rate Schemes – This is where you pay a fixed percentage on any VAT inclusive turnover, the percentage is to be agreed upon by HMRC which will arrive with your acceptance letter if you are accepted on the scheme. You do not reclaim VAT on purchases, except in a few exceptional circumstances. This percentage is based on the type of industry you’re in, however your turnover must be £150,000 or less per year.
VAT Retail Schemes – This is where you pay a fixed percentage on any VAT inclusive turnover, the percentage is to be agreed upon by HMRC which will arrive with your acceptance letter. Unlike the flat rate scheme you calculate your taxable sales for a given period and the proportions of the total sales are at different taxable rates.
VAT Margin Schemes – As the name suggests you will only be required to pay VAT on the margin you make upon selling a product. There are specific rules for defining what the margin is, and there are limits on the types of goods which are eligible for the scheme.
Annual Accounting Schemes – This may be a choice for you if you would rather issue payments annually rather than quarterly or monthly. However, you should be putting aside money for when the final liability comes through because the liability will be considerably higher as it will be in one lump sum.