How do you account for VAT? For most of us, this unwelcome tax transforms us into unpaid tax collectors, with a responsibility to ensure we charge VAT when we should, and pay what is due to HMRC in a timely fashion.
There are several ways of accounting for VAT, each with its own reasons for being. One will probably be more appropriate for your business, but the challenge is picking the most beneficial to suit the precise nature of how you trade, and how you manage your accounting and bookkeeping. While most businesses end up owing VAT to HMRC – they collect more than they spend out – this is not always the case, and a few businesses regularly receive a VAT payment from HMRC.
For a start, you are only required to register for VAT if your company annually turns over more than £82,000. You can register if your turnover is less than this, if you think it would be worthwhile – for example, if you are investing in a lot of equipment that is VAT registered. If in doubt, ask your accountant.
For any small but growing business, it is always valuable to look ahead. You may not start out as being eligible to register for VAT, but should your turnover grow then you will reach the registration threshold at some point. Planning your registration date, and any major expenditure, could have a significant impact on cashflow.
The default option for businesses registering for VAT is to submit quarterly returns to HMRC, along with a payment. These returns detail your VATable turnover, the tax you have paid out, and the tax you have levied – and therefore the net amount you have collected, which must be paid over.
For smaller businesses, many opt to register under the Cash Accounting Scheme. In fact, HMRC only allows businesses with an annual turnover of up to £1.35 million to register for this scheme. Simply put, it means you pay VAT on sales, when your customers pay you, and only reclaim VAT on purchases you make, when you pay their invoice. The idea is that, by linking the tax to the date when you actually receive it, or spend it, then that will ease the cashflow burden on smaller companies.
Alternatively, there is the Flat Rate Scheme, which sees companies paying a fixed rate of VAT, based on a set percentage of your sales less costs. The actual rate is fixed according to the type of business you are, and the industry you operate in. Your turnover needs to be less than £150,000 to qualify. The great benefit of this scheme is that it can massively simplify your bookkeeping, but the downside is that you cannot usually reclaim VAT on your purchases.
There is also an Annual Accounting Scheme, which lets registered companies pay regularly on account, then settle up at the end of the year with a VAT Return and a balancing payment (or application for a refund).
The choice of VAT regime for your business will depend on a number of factors, from whether your goods or services are all VAT registered, to how quickly or slowly your customers pay. The best bet is to take advice from your bookkeeper or accountant, and agree a joint strategy to ensure that VAT does not become a bigger administrative burden than it needs to.