VAT is value added tax which can be viewed as
a tax on consumer spending and goods imported into the United Kingdom (UK). It
can also be examined as a consumption tax based on value added to goods
and services.
The amount of VAT that the user pays is the cost of
the product minus any of the costs of materials used in the product that have
already been taxed. Businesses are expected to register for VAT with HMRC if
the total value of everything they sell that isn't exempt from tax exceeds
£83,000. There are thresholds put in place by HMRC for businesses registering
for VAT or joining a VAT accounting scheme from 1 April 2016.
VAT Thresholds:
Situation
|
Threshold
|
Vat registration
|
Higher than £83,000
|
Registration for distance
selling into the UK
|
Higher than £70,000
|
Deregistration threshold
|
Lower than £81,000
|
Completing simplified EC
Sales List
|
£106,500 or less and supplies
to EU countries of £11,000 or less
|
There are 6 different VAT schemes each one
is specific to a particularly industry and a range of
general business problems.
These schemes are:
1) Annual Accounting Scheme
2) Flat Rate scheme
3) Cash Accounting scheme
4) VAT schemes for retailers
5) Tour Operators' Margin scheme
6) Margin
schemes for second-hand goods, art, antiques and collectables
Annual Accounting Scheme
The VAT Annual Accounting Scheme business using this scheme where you pay once a year and the deadline for payment is 2 months from the last day of your accounting period. This payment is based on the payment from prior year. If it’s a company that has been trading for less than a year then the payment will be estimated based on the predicted future tax liability. If a company has over paid a refund can be claimed by the organisation from HMRC. However, if a business knowingly under pays meaning, that their VAT liability for that period is higher than the estimated payment by HMRC they are liable to prosecution.
Entering the scheme:
To join the scheme the businesses must:
a) Be VAT registered
b) Have an estimated VAT taxable turnover of £1.35
million or less in the next year, which makes it an option an advantage
for small business owners.
Leaving the scheme
Businesses can leave the scheme if:
a)
They’re no longer eligible to be in it
b) Their
VAT taxable turnover, or estimated amount, should be more than £1.6 million at
the end of the annual accounting year
Companies
that have left the scheme and decide to re-join, will have to wait year before
doing so.
Benefits
|
Disadvantages
|
Decreases
work load because businesses only have to complete one yearly return.
|
This
does not suit businesses that reclaim VAT on a regular basis, has they can
only receive repayment once a year.
|
Allows
businesses to able to better control their cash flow.
|
Although
this does not take away the requirement for business to keep all necessary
VAT records and accounts.
|
If a business’s
revenue reduces, quarterly payments may prove higher than that of the
standard VAT scheme.
|
Cash Accounting Scheme
Typically
with standard VAT accounting scheme, VAT is paid when an invoice has been
issued.
However,
with the cash accounting scheme businesses pay VAT on their sales
when their customers have paid or can reclaim VAT on their purchases when
their supplier has been paid. This scheme is particularly suitable
for retailers.
Entering the
scheme
To join the scheme the businesses must:
a) Be VAT
registered
b) Have
an estimated VAT taxable turnover of £1.35 million or less in the next
year, which makes it an option an advantage for retailers.
Leaving the scheme
Businesses can leave the scheme if:
a) They’re no longer eligible to be in it
b) Their
VAT taxable turnover, or estimated amount, should be more than £1.6 million at
the end of the annual accounting year
Businesses
do not have to notify HMRC if they wish to leave the Cash Accounting scheme.
However, businesses are required to pay any outstanding VAT for which they are
entitled an extra 6 months to pay.
Benefits
|
Disadvantages
|
A great
advantage when managing cash flow, particularly in businesses where customers
are slow to pay.
|
This
scheme will not be suitable for businesses that reclaim VAT on a regular basis.
|
Extremely
beneficial if a business has bad debts (debts that cannot be recovered).
|
This scheme
will also not be suitable for businesses that routinely buy goods and
services on credit.
|
Compared
to standard VAT accounting business don’t have to pay HMRC if their customers
have not been yet.
|
Flat Rate Scheme
The flat
rate scheme was created to help small companies decrease the time they spend
accounting for VAT. VAT does not need to be calculated on every
transaction if the Flat Rate scheme is being used; rather businesses will pay a
"flat rate" percentage of their revenue as VAT.
The percentage is
less than the standard VAT accounting because it takes into consideration the
fact that most businesses will not be reclaiming their VAT on their purchases.
There is also a variety of flat rate tax available to businesses so they can
pick the one that most benefits them, however, it depends on what sector they
trade in or operate.
Entering the
scheme
To join
the scheme the businesses must:
a) Be VAT
registered
b) Have
an estimated VAT taxable income turnover of £150,000 or less, excluding VAT, in
the next year
Leaving the scheme
Businesses
can leave the scheme if:
a)
They’re no longer eligible to be in it
b) The
anniversary of the business's using this scheme, their revenue or
estimated amount, in the last year was higher than £230,000,
including VAT
c) They
estimate that their total revenue in the next 30 days alone is going
to be higher than £230,000 including VAT
There is a year (12 months) waiting period to re-join the scheme if you choose to do so.
Benefits
|
Disadvantages
|
Easier
for businesses to keep their records
|
However
a negative of this will be that businesses cannot reclaim VAT on their purchases
|
This
allows the business owner to have more time doing other things in the
business
|
Businesses
that buy a lot of products and services from VAT registered companies could
end up paying more VAT.
|
There are
less rule for business to follow in regards to VAT
|
Businesses
should beware of making zero-rated or exempt sales, because they could end up
paying more VAT due to the fact that the flat rate percentage on sales is
still being applied. This is regardless of if the company is charging VAT of
those sales.
|
VAT scheme for retailers
Under the standard VAT accounting scheme, if a business is VAT registered they have to record the VAT paid on every sale.
However with the
VAT retail scheme, businesses can calculate the value of their VAT taxable
income or sales for a particular period. Companies can use this scheme for
supplies they acquire thorough retail, however companies must still issue VAT
invoices to any of their VAT registered companies that wants one.
Different Schemes
|
Special arrangements are given to:
|
Point of
sale scheme
|
Florist
|
Appointment
scheme
|
Caterers
|
Direct
calculation scheme
|
Chemists
|
Regardless of which scheme a business chooses, they have to in HMRC's viewpoint, provide a reasonable and fair outcome in the sum of VAT paid.
Margin
scheme
Typically
with standard VAT businesses charge VAT on their sales and purchases are
reclaim through VAT. Margin scheme benefits businesses that sell second- hand
products such as antiques.
This
scheme allows a business to be able to account for VAT exclusively on the
difference between cost paid for the product and price it will be sold for
which is the businesses margin. A business will not pay any VAT if they do not
make a profit and there will no VAT to reclaim on the product they have
bought.
Business
can still use standard VAT accounting for some purchases and sales like
expenses. Auctioneers and global accounting have particular margin scheme.
Taj Accountants Advert
Tour
Operators Margin Scheme (TOMS)
Typically
tour operators purchase products and services from companies different
countries, most of the time cannot reclaim their input tax. TOMS is a great and
efficient manner that enables tour operators to work out their VAT based only
on the value they include. This scheme is specific for companies that operate
in the re-sell and buy-in travel and other services as a principal or
undisclosed agent. TOMS is a simply measure
Published on: 09/02/2017
Disclaimer: The information provided in this blog is brought to you by Taj Accountants. As you are reading this blog of your own free will, any information taken from this blog is at your risk. Before using the information provided to apply, to your business seek professional or legal advice. Taj accountants will not be liable for any damages.
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