Struggling to keep up with the VAT payments and dreading the quarterly returns!
Panicking about where the get the money for the dreaded VAT bill!
Tempted to reduce business activity to stay away from the VAT threshold!
Sound familiar?
Managing VAT can be a stressful time for business especially if hitting the threshold has come as a surprise. In an ideal world every business would plan for VAT registration months in advance but in reality this isn’t always possible, especially whilst being busy managing all the other elements of your business.
Your accountant should be able to keep an eye on this for you and provide you with the right tools and information that you need to get ahead in the VAT game.
Although this may not bring much comfort to those that are struggling to gather the money together for their bill this quarter it should be comforting to know that there are hundreds and thousands of VAT registered business in the UK that have survived and your business can be one of them.
It is important to understand how the VAT system affects your business. Are you one of the businesses fortunate enough to receive repayments of VAT? Or maybe you are a service provider with minimal expense which is great during the day to day of running the business but not so great when it comes to checking out that VAT bill.
All is not lost, I promise you there are ways you can navigate the VAT system. HMRC have some schemes in place especially for smaller businesses and have introduced a number of schemes over the years designed to reduce the administrative burden on small businesses.
Read on to find out if there is a scheme out there for you.
The Flat Rate Scheme
The flat rate scheme is available and allows businesses to pay a smaller rate of VAT to HMRC based as a percentage of the VAT ‘inclusive’ turnover. What this means is that if the flat rate available to you is, lets say, 13% you will be charged 13% of the business income plus the vat element.
One thing to be aware of with the flat rate scheme is that you are unable to claim back the VAT on purchases. This is factored into the flat rate that HMRC has listed for your particular type of business.
You can check out if you qualify for a flat rate here. Or get in touch and we can help you to decide if the flat rate is for you.
In the first year of a claim you also receive an additional 1% so don’t forget to include this on your return.
The Annual Accounting Scheme
The annual accounting scheme helps small businesses by reducing paperwork as VAT submissions are only required once a year under this scheme. Additionally the scheme is a great way to budget for your business. If you are starting or have recently started a business and would like to know if this scheme is beneficial to you then we can advise you here at Ria-Jaine & Co Ltd but there is also lots of useful information below.
During the year under this scheme businesses are required to pay instalments based on an estimated liability for the year with a balancing payment due with the return. I would like to emphasise ‘business’ as a lot of individuals take the VAT responsibilities very personally when really it is just another business cost such as that insurance you have to pay or that leasehold and rent you have to pay, so before I begin any conversations on VAT that is one thing I try to encourage my clients to think about and to begin detaching themselves from the VAT burden and viewing it as a simple business cost.
Advantages of the scheme
- Only one VAT return is submitted each year, reducing from 4.
- Better cashflow management
- Additional time at the end of the period to complete the VAT return and budget for any outstanding VAT becoming due.
- Calculations are simplified if you use a retail scheme.
- Less paperwork
Disadvantages or potential disadvantages of the scheme
- As HMRC calculate the payments based on the previous year these may be higher, although any significant difference can be adjusted.
- You are required to let HMRC know if the VAT liability is going to be higher or lower than the previous year so this takes a level of monitoring.
- If you are usually due a repayment of VAT this scheme may not be beneficial as it means you only receive 1 repayment each year when the annual return is submitted.
Joining The Scheme
If the business expects taxable supplies in the next 12 months to be below £1,350,000 then you can join this scheme. You must be up to date with all your VAT obligations and registering as a group of companies is not an option.
To join the scheme you can complete an application form 600(AA) which can be found on the GOV.UK website. You must wait to hear from HMRC to advise if your application has been accepted before you make any changes to your VAT practices.
VAT Payments
Once your application has been accepted HMRC will advise you on the amount of each instalment that you will need to pay. However you do have the option to apply to HMRC and request for a change in the level of instalments if business activity has increased/decreased.
If your business has been registered for 12 months or more it will pay VAT in nine monthly instalments of 10% of the previous year’s liability and these instalments are payable at the end of months 4-12 of the current annual accounting period.
There is an alternative option to pay VAT to pay the VAT in three quarterly instalments of 25% of the previous year’s liability that will become due at the end of months 4, 7 and 10.
After the end of the annual accounting period (two months after) the VAT return will become due along with any balance of VAT for the year. Once you have submitted the VAT return you will need to either;
- make a payment for the difference between the final VAT bill and advanced payments already made
- apply for a refund – if the advanced payments were excessive
If your business has not been registered for at least 12 months you may still join the scheme but each instalment will be calculated on an estimate of what HMRC believe the VAT liability will be.
Applications made late in a quarter may begin at the beginning of the next quarter, otherwise the annual accounting period will usually begin at the start of the quarter in which the application is made.
Leaving The Scheme
To leave the scheme you simply need to write to HMRC.
For businesses reaching a taxable turnover of £1,600,000 the scheme is no loner an option.
Once you have left the scheme you must wait 12 months before joining again.
How can we help?
Planning for VAT can be stressful, especially when you have to keep an eye on all the other elements of the business whilst maintain some level of work life balance. There is a lot of information to absorb and before making any decisions or applications to join schemes you need to know if it will be beneficial for the business.
We can help you to plan your VAT administration and help you to decide which scheme is beneficial for you and your business. We can take care of all applications and liaise with HMRC on your behalf throughout the application process.
Below is a reminder of the eligibility. If you are eligible and want to find out how to go about making an application or reviewing your business ahead of an application then feel free to book a call in using the calendly link here.
Are you eligible?
- Vat registered
- Estimated VAT taxable turnover (everything sold that is NOT VAT exempt) £1,350,000 or less in the next 12 months.
Exceptions !!
- You left scheme in the last 12 months
- Business is part of a group of companies
- Business is insolvent
- You are not up to date with VAT returns
I hope this was helpful for you, leave a comment below to let me know if this has helped or do get in touch if you would like to discuss the options available for your own business.
Friendly disclaimer: The information contained in this article is for guidance and information purposes only. It should not be relied upon as full and complete accounting, tax or legal advice. For specific advice relevant to your own situation please speak to Ria-Jaine MAAT or another professional direct. otot
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