FAQs BUSINESS TAXATION

We highlight here the key VAT areas you need to consider when running your business. If you are starting or have started a business in Lewisham, Bromley, Kent and London areas we, at Adiva Accountants in Lewisham, can help you comply with the VAT regulations.
The VAT registered businesses act as unpaid tax collectors. They are required to account both accurately and promptly for all the tax revenue collected by them.
The VAT system is policed by HMRC with heavy penalties for breaches of the legislation. Ignorance is not an acceptable excuse for not complying with the rules.

Below we cover some of the areas that you need to consider.
However, it is important for you to seek professional advice appropriate to your circumstances.

APPENDIX: Table of sectors and rates in Flat Rate VAT Scheme

The only way to establish whether your business will benefit from this scheme is to carry out a calculation and comparison of the normal rules and the flat rate rules.

If you are starting, or have started a business in Lewisham, Bromley, Kent and London areas we can advise as to whether the VAT flat rate scheme would be beneficial for your business and help you to operate the scheme. Please do not hesitate to contact us at Adiva Accountants in Lewisham.

In the flat rate scheme, you must keep a record of your flat rate calculation showing:

• your flat rate turnover
• the flat rate percentage you have used
• the tax calculated as due

You must still keep a VAT account. There will only be one entry for each period, if the only VAT to be accounted for is that calculated under the scheme.

The VAT due is calculated by applying a predetermined flat rate percentage to the business turnover of the VAT period. The turnover will include any exempt supplies, so it will not be beneficial to join the scheme where there are significant exempt supplies.

The percentage rates are determined according to the trade sector of your business and range from 4% up to 14.5%. In the first year of VAT registration, a further 1% reduction applies off the normal rates for businesses. If your business falls into more than one sector, you should use the percentage of the main business activity as measured by turnover. This can be advantageous if you have a large percentage rate secondary activity and a modest major percentage trade. You should review the position on each anniversary. If the main business activity changes or you expect it to change during the following year you should use the appropriate rate for that sector.

Despite that you pay VAT at the flat rate percentage under the scheme, you will still be required to prepare invoices to VAT registered customers showing the normal rate of VAT. This is so that they can reclaim input VAT at the appropriate VAT rate.

If you are starting or have started a business in Lewisham, Bromley, Kent and London areas we, at Adiva Accountants in Lewisham, can advise on whether the VAT Flat Rate scheme would be suitable for your business. Please do not hesitate to contact us at Adiva Accountants in Lewisham for further advice.

Capital assets treatment

Capital goods are excluded from the flat rate scheme. If you purchase capital assets costing more than £2,000 (including VAT), you can claim input VAT on such items on your VAT return in the normal way. You must then account for VAT on a subsequent sale of the asset at the normal rate, instead of the flat rate.

European Community transactions

Income from sales of goods is included in your turnover figure. Where there are acquisitions from EC member states you will still be required to record the VAT on your VAT return in the normal way. Even though you will not be able to reclaim the input VAT unless it is a capital item as outlined above.

The rules on services are complex. Please get in touch if this is an issue so that we can give you specific advice.

The scheme cannot be used if, within the previous 12 months, you have:

• ceased to operate the flat rate scheme
• been convicted of an offence connected with VAT
• been assessed with a penalty for conduct involving dishonesty

The flat rate scheme cannot be used if you:

• use the second hand margin scheme or auctioneers’ scheme
• use the tour operators’ margin scheme
• are required to operate the capital goods scheme for certain items

The scheme is open to all businesses that have VAT turnover of £150,000 or less (excluding VAT). A business must leave the scheme when income in the last twelve months exceeds £230,000. Unless this is due to a one off transaction and income will fall below £191,500 in the following year. If there are reasonable grounds to believe that total income is likely to exceed £230,000 in the next 30 days, then the business must also leave the scheme. The turnover test applies to your anticipated turnover in the following 12 months. Your turnover may be calculated in any reasonable way. But if you have been registered for VAT for at least a year, it would usually be based on the previous 12 months.

You can join the scheme by applying by post, or online (when you register for VAT). HMRC will inform you that your application has been accepted and of the date of commencement. Only after that you can operate the flat rate scheme.

The scheme will clearly be inappropriate if you regularly receive VAT repayments.

Here we explain how the VAT Flat Rate Scheme operates. The VAT flat rate scheme is designed to reduce the administrative burden of operating VAT for small businesses. If you are starting or have started a business in Lewisham, Bromley, Kent and London areas we, at Adiva Accountants in Lewisham, can advise you as to whether the flat rate scheme is appropriate to you.

In this VAT scheme a set percentage is applied to the total turnover of the business as a one-off calculation. This is used instead of having to identify and record the VAT on each sale and purchase you make.

If you are starting or have started a business in Lewisham, Bromley, Kent and London areas we, at Adiva Accountants in Lewisham, can advise on whether the VAT cash accounting scheme would be suitable for your business. Please do not hesitate to contact us at Adiva Accountants in Lewisham for further advice.

Output tax must be accounted for when payment is received.

Cheque

They are treated as received on the date the cheque is received or if later the date on the cheque. If the cheque is not honoured an adjustment can be made.

Credit/debit card

They are treated as received/paid on the date of the sales voucher.

Standing order/direct debits

They are treated as received/paid on the day the bank account is credited.

Part payments

VAT must be accounted for on all receipts/payments even where they are part payments. Part payments are allocated to invoices in date order (earliest first) and any part payment of an invoice allocated to VAT by making a fair and reasonable apportionment.

Records

In the cash accounting scheme the prime record will be a cash book summarising all payments made and received with a separate column for VAT. The payments need to be clearly cross-referenced to the appropriate purchase/sales invoice. Additionally, the normal requirements regarding copies of VAT invoices and evidence of input tax apply.

A business can join the scheme if it expects that taxable turnover in the next 12 months will not exceed £1,350,000. Additionally, it has to fulfil the following:

• is up to date with VAT returns
• has paid over all VAT due or agreed a basis for settling any outstanding amount in instalments
• has not been convicted of any VAT offences in the previous year

All standard and zero-rated supplies count towards the £1,350,000 limit. Exception are the anticipated sales of capital assets previously used within the business. Exempt supplies are not included.

When a business joins the cash accounting scheme, it must take care not to account again for VAT on any amounts already dealt with previously on the basis of invoices issued and received.

A business can start using the scheme without informing HMRC. The scheme does not cover:

• goods bought or sold under lease or hire-purchase agreements
• goods bought or sold under credit sale or conditional sale agreements
• supplies invoiced where full payment is not due within six months
• supplies invoiced in advance of delivering the goods or performing the services

When the annual turnover reaches £1,600,000, the business must leave the scheme immediately. After leaving the scheme, VAT is due on all supplies on which it has not already been accounted for. However, for a further six months after leaving the scheme, the outstanding VAT can be accounted for on a cash basis.

Here we cover the workings of cash accounting for VAT. If you are starting or have started a business in Lewisham, Bromley, Kent and London areas we, at Adiva Accountants in Lewisham, can advise you on the annual accounting scheme.

The cash accounting scheme allows a business to account for and pay VAT on the basis of cash received and paid. This is used rather than on the basis of invoices issued and received.

Advantages

The main advantages of the scheme are as follows:

• Output tax is not due until the business receives payment of its sales invoices. If most of customers pay promptly, the advantage will be limited.
• There is automatic bad debt relief for VAT as if no payment is received, no output tax is due.
• Most small businesses find it easier to work in terms of cash flows in and out of their business, rather than the invoiced amounts.

Disadvantages

The potential disadvantages are as follows:

• There is no input tax recovery until the payment of suppliers’ invoices.
• The scheme will not be beneficial for net repayment businesses. If a business has just started up, it usually has substantial initial expenditure on equipment, stocks etc. So, if the input tax exceeds the output tax, you should delay starting to use the scheme. This way, the business recovers the initial input tax on the basis of input invoices as opposed to payments.

If you are starting, or have started a business in Lewisham, Bromley, Kent and London areas we, at Adiva Accountants in Lewisham can help you to plan your VAT administration and consider whether the annual accounting scheme would be beneficial for your business. Please do not hesitate to contact us at Adiva Accountants in Lewisham for further advice.

Any business can leave the scheme voluntarily at any time by writing to HMRC. However, once its annual taxable turnover exceeds £1,600,000, a business can no longer be in the annual scheme.

Advantages

• A reduction from four to one in the number of VAT returns needed each year.
• Cash flow can be managed more easily, as the liability to be paid each month is known and certain.
• There is an extra three weeks to complete the VAT return and pay any outstanding VAT.
• It should help to simplify calculations where the business uses a retail scheme or is partially exempt.

Disadvantages

It is possible for interim payments to be higher than needed, because they are based on the previous year. However, they can be adjusted if the difference is significant. A business is obliged to notify HMRC if the VAT liability is likely to be significantly higher or lower than in the previous year.

If the business expects that the taxable supplies in the next 12 months will not exceed £1,350,000, they can apply to join the scheme. In order to join the businesses must be up to date with their VAT returns and cannot register as a group of companies. Application to join the scheme must be made on form 600(AA) which can be found on the GOV.UK website or via a link in the VAT Notice 732. HMRC will advise the business in writing if the application is accepted.

The VAT payments

Businesses that have been VAT registered for 12 months or more will pay their VAT in nine monthly instalments. Each instalment will be equal to 10% of the previous year’s liability. These instalments are payable at the end of months 4-12 of the current annual accounting period.

Alternatively, the businesses may choose to pay their VAT in three quarterly instalments of 25% of the previous year’s liability. These are payable at the end of months 4, 7 and 10 of the current annual accounting period.

The balance of VAT liability for the year is then due together with the VAT return two months after the end of the annual accounting period.

Even if your business has been VAT registered for less than 12 months, you may still join the scheme. But each instalment will be based on an estimate of the VAT liability. HMRC will advise on the amount of the instalments to be paid. The annual accounting period will usually begin at the start of the quarter in which the application is made. However, it may begin at the start of the next quarter, if the application is made late in a quarter.

If business has increased or decreased significantly, you will be able to apply to HMRC to change the level of the instalments payable.

The annual accounting scheme is designed to help small businesses by allowing them to submit only one VAT return a year. This is instead of the normal four returns. The scheme aim is to help with budgeting, cash flow and reduce the paperwork. If you are starting or have started a business in Lewisham, Bromley, Kent and London areas we, at Adiva Accountants in Lewisham, can advise you on the annual accounting scheme.

Over the years, HMRC have introduced a number of VAT schemes designed to reduce the administrative burden on small businesses. One of these schemes is the annual accounting scheme. During the year, the business pays instalments based on an estimated liability for the year with a balancing payment due with the return.

It is important that you comply with all the VAT regulations. We can help you in a number of ways including the following:

• tailoring your accounting systems to produce the VAT information accurately and quickly
• ensuring that your business is VAT efficient and that adequate funds are available to meet your VAT liabilities on time
• providing assistance with the completion and submission of VAT returns
• negotiating with HMRC if disagreements arise and in reaching settlements
• advising as to which available VAT scheme may be appropriate for your business

If you are starting, or have started a business in Lewisham, Bromley, Kent and London areas and you would like to discuss any of the points mentioned in this VAT summary please contact us at Adiva Accountants in Lewisham.

Cash accounting scheme

If your annual turnover does not exceed £1,350,000 you can account for VAT on the basis of the cash you pay and receive, rather than on the basis of invoice dates.

Annual accounting scheme

If the annual taxable supplies do not exceed £1,350,000, the business may apply to join the annual accounting scheme. In this scheme, they will make monthly or quarterly payments of VAT, but will only have to complete one VAT return at the end of the year.

Flat Rate scheme

In this scheme, smaller businesses are allowed to pay VAT as a percentage of their total business income. Therefore, no specific claims to recover input tax need to be made, but for the fixed assets over the amount of £2,000. The scheme’s aim is to simplify the way small businesses account for VAT. But for some businesses, it can also result in a reduction in the amount of VAT that is payable under this scheme.

Retail schemes

As it is impractical for most retailers to maintain all the records required, there are special schemes for retailers.

If the value of your taxable supplies exceeds a set annual figure (£83,000 from 1 April 2016), you are required to register for VAT.

Even if you are making taxable supplies below the registration limit, it is possible to apply for voluntary registration. This is beneficial if your business was principally making zero rated supplies. As this would allow you to reclaim input VAT, which could result in a repayment of VAT.

Even if you have not yet started to make taxable supplies but intend to do so, you can apply for registration. In this way input tax on start-up expenses can be recovered and a refund will be due.

Taxable person

A taxable person is anyone who makes or intends to make taxable supplies and is required to be registered. For the purpose of VAT registration, a person includes:

• individuals
• partnerships
• companies, clubs and associations
• charities

In cases that an individual carry on two or more businesses all the supplies made in those businesses will be added together in determining whether or not the individual is required to register for VAT.

Administration

Once you become VAT registered you must submit online a quarterly return to HMRC. This VAT return shows amounts of output tax, deductible input tax together with sales and purchases figures. The VAT returns must be submitted within one month and 1 week of the end of the period it covers.

Electronic payment of VAT liability is also compulsory for all businesses.

It is beneficial for businesses who make zero rated supplies and who receive repayments of VAT to submit monthly returns.

Record keeping

It is important that up to date records are kept by a VAT registered business. These records include details of all supplies, purchases and expenses. Additionally, a VAT account should be maintained. This is a summary of output tax payable and input tax recoverable by the business. The above records should be kept for six years.

Records inspection

The maintenance of the records and calculation of the VAT liability is the responsibility of the registered person. However, HMRC will need to be able to check that the correct amount of VAT is being paid over. So, from time to time a VAT officer may come and inspect the business records. During the control visit the VAT officer will check to ensure that VAT is applied correctly. And that the VAT returns and other VAT records are properly written up.

However, even in the absence of any errors being discovered, you should not assume that your business has been given a clean bill of health.

Offences and penalties

HMRC have wide powers to penalise businesses who ignore or do not apply the VAT regulations properly. Penalties can be applied in respect of the following:

• late returns/payments
• late registration
• errors in returns

If you are starting or have started a business in Lewisham, Bromley, Kent and London areas we, at Adiva Accountants in Lewisham, can help you comply with the VAT regulations. Please do not hesitate to contact us at Adiva Accountants in Lewisham.

A transaction is within the scope of VAT if:

• there is a supply of goods or services
• made in the UK
• by a taxable person
• in the course or furtherance of business

Input VAT and Output VAT

Businesses that are VAT registered charge VAT on their sales. This is known as output VAT and the sales are referred to as outputs. Similarly, VAT is charged on most goods and services purchased by the business. This is known as input VAT.

The output VAT is being collected from the customer by the business on behalf of HMRC and must be regularly paid over to them. However, the input VAT suffered on the goods and services purchased by the business can be deducted from the amount of output VAT owed. Please note that certain categories of input tax cannot be reclaimed. Such as third party UK business entertainment and for most business cars.

Important Points

Supplies

Taxable supplies are mainly either standard rated (20%) or zero rated (0%). The standard rate was 17.5% prior to 4 January 2011. Additionally, there is a reduced rate of 5% which applies to a small number of certain specific taxable supplies. The supplies that are not taxable are known as exempt supplies.

There is an important distinction between exempt and zero rated supplies.

• If your business is making only exempt supplies you cannot register for VAT and therefore cannot recover any input tax.
• If your business is making zero rated supplies you should register for VAT. As your supplies are taxable (but at 0%) and recovery of input tax is allowed.

If you are starting or have started a business in Lewisham, Bromley, Kent and London areas we, at Adiva Accountants in Lewisham, can help you comply with the VAT regulations. Please do not hesitate to contact us at Adiva Accountants in Lewisham.