Value Added Tax (VAT) is paid by businesses, companies and individuals. Unless you are registered you cannot recover the business VAT paid on your purchases. Also you must be registered with HMRC in order to charge VAT on your invoices.
Once your business sales (called turnover in the VAT legislation) reach £83,000 in a 12 month period then the business must register for VAT although you can also register voluntarily.
A business can register for VAT online with HMRC or the forms can be completed by hand.
Jane Grey, the fictional self-employed gardener from our earlier Setting up a Business posts, is working as a sole trader and her business is doing very well but she doesn’t want to register for VAT until her sales are £83,000 as her customers are all individuals and would mean she would have to put up her prices by 20%.
If however, Jane provided gardening services to larger companies that were VAT registered then she might want to consider voluntary registration. And possibly using one of the VAT schemes.
Special VAT Schemes
If your sales (turnover) is less than £150,000 the business can apply to use the Flat Rate Scheme for VAT.
The Flat Rate Scheme was developed to make VAT administration easier and can also save the business money. The flat rate percentage varies with business sector. In the case of our gardener, Jane would fall into the category of ‘any other activity’ with a VAT rate 12% whereas management consultancy for example would charge a VAT rate of 14%.
If Jane, for example, invoiced her services at £150 per day (excluding VAT) for 225 days in a year in gardening services to one large business client, this would be £33,750 excluding VAT. The standard 20% VAT would be £6,750 and is paid by her customer, and in turn Jane would need to pay this to HMRC. However, if she uses the flat rate scheme, then she would pay £4,455 (VAT at 11%) to HMRC in the first year when there is an added 1% discount on the 12% VAT rate charged, and £4,860 (at 12%) in the second year. This is a potential saving of £2,295 in the first year and £1,890 in the second year.
Other popular VAT schemes are cash accounting and annual accounting.
For cash accounting, the VAT return is completed on a cash in, less cash out.
With annual accounting, the VAT is estimated for the year and paid in four quarterly instalments with one VAT return each year to “true-up” the figures.