VAT is a slightly different kind of tax than income tax and corporation tax, which are income based. You would need to submit a tax return at the end of the year and declare the amount of tax to pay based on your profit/income. However, VAT is an indirect tax. That means that if you are VAT registered, you are registered as a tax agent for the tax man. When you sell any good or services you charge a certain amount of VAT on behalf of the tax man. After doing so, you declare the VAT return and pay the VAT directly to the tax man. It is paid on behalf of your customers.
Do You Have to Register VAT?
Firstly, you would need to ask yourself whether your type of service or products are required to register for VAT. For example, if you are a doctor, the services that you carry out that are related to human health are exempt from being registered for VAT. If you provide a healthcare service and sell equipment that have been registered for VAT then you have a segregated type of service/goods. That means the healthcare service is still exempt but because you sell the equipment then you can register the business for VAT. You would need to declare that you charge VAT on the sales of the equipment and submit a VAT return. For a majority of other services or goods, you might be able to register for VAT.
The second question you would need to ask yourself is based on the threshold. At the moment, the annual threshold for VAT registration is £85,000 for 12 months. If you are under that threshold it means you can voluntarily choose whether you would want to register or not. It is not a choice and an obligation if you are aware that the services or products you are providing are required to be registered for VAT.
Different Circumstances if You Do Not Meet the Threshold
- If you are a start-up company, you only incur the cost and you have very little sales/no sales but have a lot of expenses that incur VAT then it might be beneficial to register and claim the VAT back to aid the cash flow.
- If you are still under the threshold but your business is growing really well then you might need to register VAT at this point just in case your business will be above the threshold very soon. It is more than likely you will receive a call from HMRC if you register late and they might carry out an investigation or give you a penalty.
- If you see certain services not charging VAT it will be obvious that they are not earning above the threshold. On the other hand, if the services are charging VAT, it is likely that they haven’t reached the threshold yet but it is perceived that they are big. If it is important to you to be perceived as big then it’s probably better for you to register VAT.
It is important to note that the registration form for VAT, that you fill in online, does not cost you anything but if you want more reassurance it is best to ask a professional to do it for you.
What Happens Once You Are Registered
Once you are registered, on a quarterly basis you are expected to declare how much VAT you need to pay. If your VAT number is confirmed, you will have to invoice customers and charge 20% of VAT on top of what your service/product is worth. At the same time, if you have purchased anything and paid VAT to the suppliers you need to keep their invoice in order to claim the VAT back. At the end of the quarter, you are only paying the net amount of VAT to HMRC which is a basic duty.
For some rare cases, if you qualify for being on annual basis then you only need to submit a VAT once a year. That does not mean you only pay VAT once a year. You will still need to pay quarterly, which is based on the estimation on how much VAT you will pay at the end of the year. When you submit the annual VAT, you will be able to make adjustments on that. It is important to keep records of your VAT certificate, sales invoices and purchase invoices such as receipts.
If you are an IT consultant and you register VAT but you have very little expenses which means you cannot really claim anything. In this scenario, it might be beneficial to register on the flat rate scheme. This means you only pay a fixed percentage to the tax man every quarter on your VAT inclusive invoices. For instance, if you invoice £10,000 worth of service plus VAT which totals to the amount of £12,000 then you only pay 14% of that total amount. The percentage depends on the service you have to offer. From April 2017, no matter what service you have to offer, some businesses may have to pay 16.5% if they are on the flat rate scheme. You cannot reclaim VAT on purchases unless you have a capital item that is more than £2,000.
Selling Services to the EU/Foreign Country
- Business to Consumer – If the client is in the EU, you still have to charge 20% of UK VAT to your customer.
- Business to Business – If your customer is registered for VAT in the country that they are in then you do not need to charge VAT.
What Can Trigger a VAT Investigation?
There are some circumstances that might trigger a VAT investigation. For example, if your VAT return is inconsistent, you are often late when filing or one quarter has a big amount of liability and another quarter there is a big amount of claim. In this case, HMRC might want to have a look at the records and see what is going on with your business. At times the investigation may be random, but in most cases HMRC want to protect their revenue. If you have a big claim it is very likely there will be a full investigation and HMRC will send you letters to ask you for certain documents.
If you do receive an investigation it is best not to panic. You need to make sure you keep all records properly so that you can pull out any VAT receipt or invoice for HMRC. HMRC might give you further advice because some business owners might not be aware of certain things. An investigation is also a good opportunity for you to clarify certain questions that you are not sure about.
3 Principles to Help You Get Through the Investigation
- Telling – It is best to tell HMRC what situation your business is in. If you do discover something before they find out it is best to tell them as soon as possible.
- Helping – Help HMRC to understand your business and if there is an issue help them understand why it went wrong.
- Giving – Give HMRC access to information as they have no right to look for the information themselves without your permission.
Things to Do to Avoid an Investigation
Sometimes an investigation happens unexpectedly but it is important to try your best to avoid it. Make sure you file all of your tax returns on time, normally you have 1 month and 7 days to prepare the certain quarterly VAT return. Keep all your records and keep VAT bills. If you do have a big VAT bill it is likely you will have a big claim. It is best to tell HMRC in advance and send them a copy of that bill to help them understand what is going on.
Please note that this is not a replacement of tailored professional advice. For personalized and confidential review of your taxes and tax saving opportunities, please contact the author of this article below.