When VAT was first announced in 1973, the Chancellor of the Exchequer claimed it to be a ‘simple tax’. Fast forward to 2001 and Lord Justice Sedley’s view summed up the tax as ‘a kind of fiscal theme park in which factual and legal realities are suspended or inverted’.
VAT is certainly no longer a simple tax, and we at Bright Horizon can easily understand why VAT is often said to be the most complex and time-consuming tax for businesses. With it now ever easier for small businesses to trade not only in greater volume but also internationally, it is increasingly important for entrepreneurs and their businesses to understand VAT.
When do I have to register?
It is compulsory for you to register for VAT when your turnover reaches £83,000 in a 12 month period or if you will exceed the threshold in a single 30 day period. You must also register if you receive more than £83,000 worth of goods from the EU.
You can choose to register voluntarily before you reach the threshold, which can be beneficial to certain types of businesses.
What are the rates of VAT?
In the UK there are 3 rates of VAT:
- Standard rate of 20% (Most goods and services)
- Reduced rate of 5% (Some goods and services (e.g energy))
- Zero-rate of 0% (Zero-rated goods and services, such as most food and children’s clothes)
Some things are also exempt from VAT such as postage stamps and financial transactions
What are the VAT schemes?
Standard Accounting Scheme
This is the default scheme. You are liable for VAT at the point of issuing an invoice to a customer and you can reclaim VAT at the point you receive an invoice from a supplier.
Cash Accounting Scheme
With the cash accounting scheme, you only pay VAT when your customer pays you or reclaim VAT when you’ve paid your suppliers. This can be beneficial to cash flow for some businesses although it may not be suitable if you buy most of your goods or services on credit.
Flat Rate Scheme
Instead of calculating VAT on every transaction, with the flat rate scheme you pay a percentage of your turnover instead. Available to businesses with turnover less than £150,000, this scheme not only simplifies the VAT accounting process but can also be beneficial to businesses with few VAT chargeable operating expenses.
Annual Accounting Scheme
Instead of submitting VAT returns each quarter, with the annual scheme you submit your VAT return just once a year. You pay your VAT in advance based on your last return or your estimated VAT liability if new to VAT. Once your return is submitted, you then either pay or reclaim the difference. Now although this does mean less paperwork, if you would otherwise regularly reclaim VAT this might not be the scheme for you as you would only receive one refund per year.
When do I have to submit a VAT return?
VAT returns are due 1 calendar month and 7 days after the end of your VAT period (which is quarterly for most businesses)
What if I buy & sell internationally?
If you buy or sell internationally, VAT becomes more complicated. Many factors affect if and how much VAT is applied to both purchases and sale. These include place of supply, whether you’re selling to a consumer or another business and whether it’s within or outside the EU. Unfortunately, a topic far greater than we have room for in this introductory blog post.
Can you help me?
Of course we can. The team here at Bright Horizon can help you not only to understand and comply with VAT but also develop the most beneficial solutions for your business.
You can also view more detailed information on VAT here on the government website.