A Basic Overview of VAT

Note: VAT is extremely complex. Take advice from your Accountant about becoming VAT registered and how to record VAT in your bookkeeping, and if you’re unsure about anything to do with VAT, you can also call the HMRC VAT helpline on 0300 200 3700.

VAAT

HMRC – VAT

Becoming VAT (Value Added Tax) registered means that you are collecting and paying over a tax to the HMRC. You charge VAT on top of your prices to all your customers and in return you can reclaim the VAT you’ve been charged by other VAT registered business. It is a legal requirement to keep accurate VAT records, submit them to the HMRC and pay over the amount owing.

There are several VAT accounting schemes, below are the ones used most often. Your Accountant can advise you on which is best suited to your business.

Standard VAT Accounting (Accrual) – the figures entered on the VAT return are taken from the dates the sales and purchase invoices were issued. This means you are collecting the VAT on sales invoices as soon as they are issued even if they haven’t been paid, and reclaiming VAT on purchase invoices at the date of issue even if you haven’t paid them.

Cash VAT Accounting – the figures entered onto the VAT return are taken from the dates the sales and purchase invoices are paid. This scheme is beneficial to your business if your customers are slow to pay.

Flat Rate VAT Accounting – reduces the amount of bookkeeping required, but you cannot reclaim VAT on your purchases. Depending on the type of your business, you are issued with a percentage rate, which will be less than the standard rate. The VAT you pay to the HMRC is this percentage of your turnover. Your sales invoices show the standard VAT rate but you are not required to separate out the VAT when recording your purchases.

Although most businesses are required to submit their VAT return quarterly, it is a good idea to check all VAT transactions have been recorded correctly, and how much is due to the HMRC so far (the liability) on a monthly basis. This means you will be prepared for the submission of the return, will have the money available for payment and won’t be subjected to hefty fines.

Once you’re VAT registered, you are required to add the current VAT rate to your sales invoices. It is to be shown as a separate figure. You will be collecting the total figure from your customers.

It is very easy to forget that when a customer pays, not all the money is yours. In a perfect world, you would immediately transfer the VAT amount into a separate bank account waiting to be paid to the HMRC, but this could be three months away, in which time you could wisely make good use of it. Most importantly, make sure the transaction is recorded correctly in your books so that you have a record of how much is due.

Being VAT registered also means you can claim back the VAT you have been charged when purchasing. There are many rules and regulations regarding what VAT can be reclaimed.

HMRC – reclaiming VAT.

In general, if you are going to reclaim VAT, you need a VAT receipt that shows the supplier’s VAT number as well as how much VAT was charged and at what rate. If you have no receipt, or the receipt doesn’t show these details, you cannot reclaim the VAT, even if it was charged. When recording your purchases in your accounts, separate out the VAT. These amounts can then be set against the amount you owe (from sales) reducing the total you pay over at the end of the quarter.

At the end of each month, look over all the recorded transactions to make sure VAT was added where it should have been and reclaimed correctly. It is a good idea to be sure you are in a position to easily pay over the VAT liability (the amount collected minus the amount reclaimed) at the end of the quarter.

If you owe the HMRC a large amount at the end of the quarter, unless you’ve not recorded your transactions correctly, it usually means you’ve had a very profitable three months. If the HMRC owe you money, it usually means you’ve made a loss over the three months.

Summary

Take advice before becoming VAT registered.

Always make sure you have a VAT invoice/receipt for all purchases from VAT registered suppliers.

Remember the amounts received into your bank account from customers includes the VAT to be paid to the HMRC.

Pointers

  • Becoming VAT registered means you charge VAT on top of your prices to your customers
  • In return you can reclaim the VAT you’ve been charged by other VAT registered business
  • You must keep accurate VAT records, submit them to HMRC and pay the amount owing
  • To reclaim VAT, always obtain a VAT invoice/receipt for all purchases from VAT registered suppliers
  • There are several VAT accounting schemes, your accountant can advise on which is suitable
  • Keep a check on all VAT transactions and how much is due to HMRC on a monthly basis

Apr 16, 2015