VAT For Startup Companies
With such a great deal of jargon being used across various industries, it can be easy to get overwhelmed with the thought of having to register for VAT. In this article, Clive Lewis, who is Head of Enterprise for the ICAEW (Institute of Chartered Accountants in England and Wales) offers a guide on the basics of VAT to assist business owners with the process of getting registered for VAT.
What is VAT?
The French invented VAT during the 1950s. The VAT tax must be signed up to by all new European Union/Common Market members when they join. VAT can only be charged on services and goods that you sell after your business registers for VAT. The VAT tax gets charged on:
Loaning or hiring goods to someone
Business sales, e.g.g whenever you sell services and goods
Selling business assets
Items that are sold to staff, such as canteen meals
‘Non-sales’ such as gits, part-exchange, and bartering
Business goods that are used for personal purposes
If you own a VAT-registered business, then you are required to report the amount of VAT that you charge and how much VAT you pay to HMRC (HM Revenue and Customs).
Compulsory registration threshold for VAT
You are required to register for VAT if over the previous 12 months (for the 2018-19 tax year) your turnover was more than £85,000. You also can register voluntarily at any time (when your turnover over is under the threshold for compulsory registration).
How does VAT work?
VAT gets added to a sales invoice. A purchase invoice has VAT added when a supplier is registered with VAT. VAT invoices must include all required information including the VAT registration number. A majority of items incur the standard VAT rate (currently at 20%) but there are some items that are zero-rated (0%) and others are charged at a reduced rate.
Certain items are exempt from the VAT tax or are zero-rated for VAT. It is definitely worth it to be aware that a particular item’s exact definition can affect whether or not VAT gets applied to it. The VAT system contains a number of different irregularities, with some of them resulting in heated debates between HRMC and businesses.
The ‘Jaffa Cakes case‘ is one famous example. It made its way to a Tribunal in order to determine whether it should be classed as luxury biscuits or cakes. Luxury biscuits are subject to the standard rate VAT while cakes are exempt from the VAT tax. McVities, the Jaffa Cakes makers, insisted that their product was small cakes and the eventually the tribunal ruled in the favour of McVities.
The way the basic process works is that a VAT runt gets submitted online to HMRC every three months. Input tax (on purchases) and output tax (on sales) are nets, and then the difference – where outputs usually exceed inputs – gets paid to HMRC. In situations where inputs exceed outputs, HMRC makes a repayment. There are various specified ways that payments can be made. To keep up to date on VAT laws visit VATIT.
- Other potential schemes that are available
- Cash accounting (or a payments and receipts system) when business VAT taxables sales are lower than £1.6 million:
- Using payments to suppliers and receipts from customers instead of invoices can be useful when bad debts and cash-flow are problems.
Annual Accounting Scheme:
- You make three quarterly or nine monthly installments that are based on an estimated liability or an estimate of the VAT that was paid during the previous year
- One VAT return must be completed each year
- Required records must be kept in the event of a VAT inspection
- You only receive one repayment a year so it is not suitable for businesses that reclaim VAT regularly
Flat Rate Scheme:
- VAT does not need to be recorded and calculated on every transaction
- VAT is paid as a flat rate percentage of your turnover based on sector figures
- The percentage is lower than the standard VAT rate due it being the net of Input Tax
- Retailer VAT schemes – There are several schemes you can use if you make sales to the general public.
Goods can be posted abroad by businesses if they receive small overseas orders. For larger orders, a majority of businesses use a freight forwarder or courier. The exporter is asked to complete a Pro-forma invoice that includes VAT if the goods are subject in the UK to VAT.
Businesses that sell digital services such as software or downloadable videos to EU consumers may register for VAT in the customer’s EU state. Or a VAT MOSS scheme UK return can be completed each quarter and only make one payment to HMRC, which will then pass on relevant shares of VAT to the VAT authority in each member state. A business is required to register with HMRC in order to use the VAT MOSS scheme. Businesses that are under the UK VAT threshold that sell digital services to customers in the EU will still be required to register for and charge VAT.
This change to digital services sales arose due to changes to the rules for “place of supply” from being determined according to the supplier’s member state VAT rates to the customer’s. This change went into effect on 1 January 2015. The EU is planning to extend the MOSS systems so that non-digital services and similar supplies of goods are covered to bring a cross-border threshold to individual EU countries for supplies.
Many businesses in the UK avoid the paperwork that is involved with VAT by selling on platforms like Amazon.
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