Taj Accountants: VAT

VAT

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Different VAT Schemes and Their Benefits: Annual Accounting Scheme, Cash Accounting Scheme and Flat Rate Scheme

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.

Channel S on 30/12/2015

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

Note: more on VAT thresholds can be found on our VAT registration and Deregistration blog.

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.

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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

TOMS allows VAT to be recorded on travel supplies without a company having to register and taking into consideration or account for tax in every country that the goods and services are being utilised.

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.

VAT Deadline, Penalties and How to Avoid Them

Abul Nurujjaman 2:13 AM Add Comment

Abul Nurujjaman

Deadlines

The deadlines for submitting VAT is dependent on the deadline shown on your VAT return. There are two different deadlines for submitting your VAT payments, the most common type of VAT is paid 4 times a year it is called VAT MOSS scheme and the other is the VAT annual accounting scheme.

Under the VAT MOSS scheme, businesses need to pay quarterly if the dates happen to be on a weekend or a bank holiday business are required to pay the preceding working day.

These dates are:

20 April for the quarter finishing 31 March

20 July for the quarter finishing 30 June

20 October for the quarter finishing 30 September

20 January for the quarter finishing 31 December

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The VAT annual accounting scheme is a scheme where you pay once a year and the deadline for payment is 2 months from the last day of your accounting period. Under this scheme your predicted VAT taxable revenue or turnover needs to be £1.35 million or less, which makes it an option an advantage for small business owners. Under this scheme businesses can make early VAT payments towards their bill, the amount businesses pay is contingent upon their previous return or it is predicted for business that is new to VAT. Every year only one VAT return is submitted. After submitting their VAT return businesses, can either make a last payment which can be the distinction between their advance or early payments and their definite VAT bill. Business can also file an application for a refund, if they have overpaid on their VAT payment.

Penalties and Surcharges

Penalties occur when HMRC put a default next to the business account. Defaults are recorded when HMRC does not receive a business's VAT return by the date of the deadline or when the complete payment for VAT has not entered HMRC's account by the deadline.

HMRC can charge a business up to a 100% for a penalty. The first penalty is for £400 if a business submits a paper VAT return unless told otherwise by a HMRC that an online copy is required.

The second penalty is 30% of an assessment which is sent by HMRC which might be low and the business does not tell them it is incorrect within 30 days. An assessment is an estimation given by HMRC of what they think a business owe's them, this is only sent to businesses that have not sent their VAT Return and not paid any VAT that is due on time.

The third penalty is 100% of any under estimated or over estimated VAT claimed if businesses send a return that includes careless or purposeful errors.

Surcharges

A business can go into a 12 month 'surcharge period' if they default. HMRC will write a letter to a business that defaults describing if they owe any surcharges and what will occur if they were to default again. Defaulting again within this time period could result in the one an addition 12 month extension. Furthermore businesses might have to paid an additional amount including the VAT they already owe.

The amount the business pays depends on the surcharge percentage on the VAT unpaid on the deadline date for that accounting year which is the default. As seen in the table below the surcharge increases month on month every time the business defaults in the surcharge period. Business can rest easy because they are not charged for their first default.

Table: how much businesses are to be charged

Defaults in between 12 months	Surcharge if annual revenue is less than £150,000	Surcharge if annual revenue is more than or is £150,000
2^nd	No surcharge	2% (there should be no surcharge if it is below £400)
3^rd	2% (there should be no surcharge if it is below £400)	5% (there should be no surcharge if it is below £400)
4^th	5% (there should be no surcharge if it is below £400)	10% or £30 (depends on which one is higher)
5^th	10% or £30 (depends on which one is higher)	15% or £30 (depends on which one is higher)
6 months or more	15% or £30 (depends on which one is higher)	10% or £30 (depends on which one is higher)

However, exceptions to the surcharge are made if businesses submit their VAT return after the deadline such as; full payment by the due date, have to pay no tax and are due a VAT repayment.

How to avoid penalties

It is in the interest of all business owners to pay their VAT on time in order to avoid penalties. By paying on time and having excellent records are good and effective ways to avoid paying penalties.

At Taj accountants we understand how HMRC penalties work, which in return helps us provide an efficient and effective service to our clients. Our Authorisation as an agent, allows HMRC to deal with us on behalf of our clients. As Advisors at Taj Accountants, we feel all our actions and commitments are geared towards helping you avoid penalties and problems.

We believe we provide our clients with adequate and reliable information on how the system works. This includes looking into our clients' record keeping arrangements and processes to see whether or not they are adequate enough to produce accurate returns.

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Published on: 09/02/2017

Vat registration and deregistration assessment

VAT

Abul Nurujjaman 6:08 AM Add Comment

Abul Nurujjaman

VAT is value added tax which can be defined as a consumption tax based on value added to goods and services (European commission, no date). Similarly it can be viewed as a tax of consumer spending and goods imported into the United Kingdom (UK).

As a general tax it is applicable to commercial activities of business that includes the provision of services and the manufacturing and distribution of products. Businesses are expected to register for VAT once they go above a threshold specific to their company. Customers that may be registered for VAT and use the goods or services for commercial purposes can reclaim the VAT on the products they have purchased. This accounts for value added on the activities of a business.

VAT is charged on any sale as a percentage of the sale price but the taxable individual can deduct all tax already paid at the previous stage. As a result, taxation is not doubled and tax is charged on the value added at every production and distribution. The final price of the product is equivalent to the addition of the values at the previous stage. The last VAT paid consists of the sum of the VAT paid at each stage.

Channel S on 30/12/2015

Current registration and deregistration limits:

VAT registration limits in the final 12 months for supplies is related to businesses whose supplies are taxable. This will involve supplies that VAT is charged at a given rate and HMRC needs to be made aware of if your revenue goes above the limit in a 12 month period.

The rates can either be zero, standard or reduced rate. The limits for registration is £83,000 and the deregistration limit or threshold is £81,000 in 1^st April 2016.

The history of VAT:

VAT was introduced in the UK in 1973 and was just a 10 percent tax on goods and services purchased. This was a requirement of joining the EEC (European Economic community) which is now the European Union (EU). In the early years the imposition of the VAT, the level of tax, did not exceed 10 percent except with petrol and at one time electronics which in those days were seen as luxuries. There were some parts of the government that insisted that particular items were essential and VAT should not be charged on customer purchase. These items such as books and food in some EEC countries at the time were charged at a zero rate.

The rate on luxury goods under the leadership of Margret Thatcher was discarded and then changed into the higher standard rate which was raised from 15% to 17.5% in 1991. Prime Minister Sir John Major increased the rate of VAT on utility bills from being zero rated to 8%. This was later reduced to 5% under the administration of Gordon Brown.

Food and drink typically consumed by humans such as bread and milk (daily essentials), are not subject to VAT charges or are zero-rated. However, foods such as alcohol, takeaways and snacks are charged on a VAT standard rate because they are deemed as none essential. For example, if you were to purchase fresh whole carrots it will not be subjected to VAT however if the carrots had been shredded or chopped then you will have to pay a standard rate. This is because according to HMRC the customer didn't prepare the carrot by shredding it. A criticism of this guideline is that it does account for unconventional products such as smoothies, which is a food that can be made at home and bought so the zero rating rules apply. In the past there were not a lot of people drinking smoothies.

In the past this has led to some mighty big court cases. One case involves chocolate covered snacks such as Jaffa cakes. The lawyers argued that this snack was a cake and therefore should be subjected to a zero rate of VAT (Wallop, 2010). The lawyers won this argument against HMRC which still watches that industry heavily. However, it should be expected because for HMRC it is one of its most effective ways income is generated for the agency and government. In fact it has been suggested that every point added to the VAT is expected to bring in an estimated £4.5 billion.

Historically, the VAT registration and deregistration limit in 1^st April – 31^st March 2015 for example was £82,000 and £80,000 respectively. During 1^st April 2013- 31 March 2014 the VAT registration and deregistration limit was £79,000 and £77,000 respectively. It showcases that over time in the future the VAT registration and deregistration limit will increase year on year.

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Where VAT is going ? (future of VAT):

VAT is currently 20%, this is however subject to change due to the government taking over. Looking into the future and observing the current state of the economy, VAT is more likely to increase to accommodate new or raising expenses of the new government and to combat possible inflation.

Published on: 28 /07 /2016