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VAT – A Summary

VAT – A Summary

At AHACCOUNTANTS, we highlight key VAT considerations for businesses operating in the Nottingham area. If you’re starting or have recently started a business, we can help you navigate VAT regulations and ensure compliance.

VAT-registered businesses act as unpaid tax collectors, responsible for promptly and accurately accounting for all tax revenue collected. HMRC polices the VAT system rigorously, and there are severe penalties for non-compliance. Ignorance of the rules is not an acceptable excuse.

It is essential to seek specific professional advice tailored to your circumstances.

What is VAT?

Scope
A transaction is subject to VAT if:

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

Inputs and Outputs
Businesses charge VAT on their sales (output tax) and pay VAT on most goods and services purchased (input tax).

  • Output Tax: Collected from customers on behalf of HMRC and must be reported in a VAT return.
  • Input Tax: Can be deducted from output tax owed, so only the net amount is paid to HMRC. Note that certain VAT categories, such as third-party UK business entertainment and most car purchases, cannot be reclaimed.

Key Points to Consider

Supplies
Supplies are classified as:

  • Standard Rated: 20%
  • Zero Rated: 0%
  • Reduced Rate: 5% (applies to specific taxable supplies)
  • Exempt Supplies: Not taxable; if your business only makes exempt supplies, you cannot register for VAT and cannot recover any input tax. If making zero-rated supplies, you should register for VAT to reclaim input tax.

Registration
You must register for VAT if your taxable supplies exceed the threshold of £90,000 (effective from 1 April 2024). Registration can be applied either by looking back over the previous 12 months or looking forward to the next 30 days.

  • If below the threshold, you may apply for voluntary registration to reclaim input VAT.
  • If not yet trading but planning to, you can register as an ‘intending trader’ to recover input tax on startup expenses.

Taxable Person
A taxable person includes anyone making taxable supplies and who is registered or required to be registered for VAT, covering:

  • Individuals
  • Partnerships
  • Companies, clubs, and associations
  • Charities

If you operate multiple businesses, all supplies are combined to determine VAT registration requirements.

Administration
Once registered, you must submit a quarterly VAT return to HMRC, detailing output tax collected and input tax deducted. Returns must be filed online, using HMRC-approved software, within one month and seven days from the end of the reporting period. Electronic payments are also mandatory by the same deadline.

  • Businesses making zero-rated supplies with net repayments may benefit from submitting monthly returns.
  • Businesses with expected annual taxable supplies under £1,350,000 can apply for the annual accounting scheme, requiring only one VAT return at the year’s end.
  • The cash accounting scheme can also be beneficial, allowing VAT to be accounted for on a cash basis rather than an accruals basis.

Record Keeping
Maintaining complete and up-to-date records is crucial for VAT-registered businesses. This includes:

  • Details of all supplies, purchases, and expenses
  • A VAT account summarizing output tax payable and input tax recoverable

All records should be kept for six years, maintained in software that meets HMRC requirements.

Inspection of Records
Maintaining accurate records is your responsibility, but HMRC may conduct control visits to verify compliance. Ensure that VAT rules are being applied correctly, as even if no errors are found during an inspection, it doesn’t guarantee HMRC approval.

Offences and Penalties
HMRC has significant powers to penalize businesses that fail to comply with VAT regulations. Potential penalties include those for:

  • Late returns or payments
  • Late registration
  • Errors in returns

Retail Schemes
Special schemes exist for retailers, recognizing that maintaining complete records can be impractical.

  • Flat Rate Scheme: For smaller businesses (annual taxable turnover not exceeding £150,000), this scheme allows you to pay VAT as a percentage of total income, reducing record-keeping requirements and simplifying accounting.

Making Tax Digital for Business: VAT
Under Making Tax Digital for VAT (MTDfV), all VAT-registered businesses must keep digital records and submit VAT returns using HMRC-compatible software. While there are exemptions, they are tightly defined and may not apply to most businesses.