Administered and collected by the HM Revenue and Customs (HMRC) Value Added Tax or VAT is a tax levied on most of the goods and services consumed in the UK. With the current threshold for VAT Registration being £85,000, it is the third largest source of revenue for the UK government, after the Income Tax and National Insurance. So if the turnover of a business for any 12 month period goes beyond the threshold amount, they are expected to register and pay VAT to the HMRC.
There are 3 VAT rates, standard at 20%, reduced at 5 %, zero at 0%. In addition, some goods and services are either exempt from the VAT or simply outside the VAT system.
Standard VAT rate applies to most products including Alcohol, Chocolate, Luxury items, Road fuel, Taxi Fares etc. The reduced VAT rate applies to goods like children’s car seats, maternity pads, sanitary protection products, mobility aids for the elderly etc. Zero VAT rate applies to aircraft’s, books and newspapers, public transport fares, frozen food (not ice cream), children’s clothing etc. Education, art works, health services, sports activities etc. are exempted from the VAT.
Any business crossing the VAT threshold amount has to first register to get their VAT Registration number which they have to start using in all their invoices while charging their customers. Registration can be done online at www.gov.uk/vat-registration/how-to-register.
The VAT Return records things like your total sales and purchases, the amount of VAT you owe, the amount of VAT you can reclaim, what your VAT refund from the HMRC is. Usually, the amount of VAT you pay is the difference between the VAT charge in your sales invoice and your purchase invoice.
For Example: If you buy a product of £100 with a VAT of 20% at £120 your VAT Input is £20 from purchase. And when you sell the same product at £200 with a 20% VAT at £240 your VAT output is £40. Your VAT return will be £40-£20 = £20 that will have to be paid to the HMRC.
This amount has to be reported and paid to the HMRC.
The VAT returns are made electronically and the HMRC offers free online services and has also provided a list of approved accounting software’s like Xero and FreeAgent that can be used to file the return. To submit your VAT return you need a VAT number and a VAT online account.
There are multiple schemes apart from the standard VAT accounting, like the VAT Flat Rate Scheme, VAT Cash Accounting Scheme, VAT Annual Accounting Scheme, VAT Margin Schemes and VAT Retail Schemes. Each of the schemes have their own eligibility criteria. Each suitable for different types of businesses and services.
This scheme reduces the VAT percentage from 20% to anywhere between 4% to 14.5% depending on the type of business and 16.5% for a limited cost business where the total purchase cost of goods is below £1000 a year.
In the Flat rate scheme, the VAT return simply calculates the multiplying of the flat rate percentage with the total sales amount.
For Example: You bill your customer £1000 with a 20% VAT at £1200. And your fixed rate is 10.5% for your type of business, then you pay the HMRC 10.5% of £1200, or £126. You get to keep the difference between the VAT you charged your customer and the VAT you paid to the HMRC. However you cannot reclaim the VAT on your purchases, Exception being certain Capital assets that are over £2000. For more details check www.gov.uk/vat-flat-rate-scheme/how-much-you-pay
Accounting period: Quarterly VAT Returns are usually made every 3 months by submitting a VAT Return to the HMRC. This follows a rolling calendar with the first accounting period starting from the month and year of registration. Not starting from the Calendar year or the Financial year.
For Example: For one business it could be from Feb 2017 to April 2018, May 2018 to July 2018, August 2018 to Oct 2018, November 2018 to January 2019 and so on. And for another business it could be from July 2018 to September 2018, October 2018 to December 2018, January 2019 to March 2019 and so on.
The last date for submitting the return is usually 1 calendar month and 7 days after the end of the accounting period. Based on the Mode of payment, Online/Telephone Banking, Direct Debit, Online Debit/Credit Card, Cheque etc. there may be a difference by a few days corresponding to the Speed of the transaction and when the payment reaches the HMRC Account. However payments by cheque need prior approval from the HMRC.
For Example: If the Accounting period ends at 30 June 2018 for your business, the deadline for submitting the VAT Return would be & 7th August 2018 for Online/Telephone Banking and 3rd August 2018 for Direct debit and 31st August for a cheque. The VAT payment deadline can be calculated at https://www.gov.uk/vat-payment-deadlines.
A surcharge and penalty will be levied if the VAT Return isn’t submitted and also received by the HMRC by the set due dates.
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