Value Added Tax (VAT)
VAT is a tax on sales and has nothing to do with profit.
The current registration limit is £85,000 so once your sales reach £83,000 the last 12 months you must register for VAT immediately.
This can be done by downloading the form from HM Revenue & Customs website or completing the form online which is much better as once the form is submitted you get a reference number and you can track the progress.
If you are registered for VAT and your sales excluding VAT for the last twelve months fall below £83,000 you can apply to de-register for VAT and the same process can be done either online or downloading a form and sending it by post.
Once you are registered for VAT you will need to set up an online account with HM Revenue & Customs so you can submit the return online and if you set up to pay by direct debit you will get extra time to pay.
What VAT Are There
Once you register for VAT you have a choice of what scheme you want to report under:
- Invoice Accounting
- Cash Accounting
- Flat Rate Scheme
- Capital goods Scheme
With this scheme when issuing your sales invoices you will offset the VAT element against the purchase Invoices VAT element and the difference will be paid over to HM Revenue & Customs or a rebate will be sent to you if your purchases exceed your sales.
How this scheme works is that you only pay over the VAT on sales when you receive the money on any sales invoices you have issued and also only claim back the VAT when you are making payment.
This scheme is muck kinder on cash flow as you are paying over the VAT liability once you receive the cash in.
Flat Rate Scheme
This scheme is completely different to the other two as you are only paying over a percentage of the sale plus vat and do not claim any purchase VAT back.
The process is you make an application to register for VAT and you pick your industry and a different percentage will relate different industries once this has started you cannot change the industry rate.
The advantage is that this is less time consuming than the other schemes and ideal for small businesses or consultants who have very little expenses in their industry.
The only other factor to consider is that you can only claim for Capital Equipment like computers, machinery over £2000.00 excluding VAT.
Capital Goods Scheme
If you acquire or create an expensive capital asset, or already have one when you register for VAT, you may have to adjust the amount of VAT you reclaim. You do this by using the Capital Goods Scheme, which allows you to spread the initial VAT claimed over a number of years. You can reclaim more if the proportion of your taxable supplies increases, you’ll have to repay some if it decreases. Taxable supplies are the sales that you make which are standard, reduced or zero-rated.
Assets included in the Capital Goods Scheme
The assets that are included in the scheme are:
- land, buildings and civil engineering work
- computers and computer equipment
- aircraft, ships, boats or other vessels
If your asset is used only for making taxable supplies, you can reclaim all of the VAT you’ve paid. If you use the asset partly for business and partly for making exempt or non-business supplies, you can only reclaim a proportion. You do this by using your partial exemption and non-business calculations.
Land, buildings and civil engineering work
You’ll have to use the Capital Goods Scheme if you spend £250,000 (excluding VAT) or more on:
- buying land, a building or part of a building or civil engineering work
- constructing a building or civil engineering work
- refurbishing, fitting out, altering or extending a building or civil engineering work
Civil engineering work includes things like roads, bridges, golf courses, running tracks and the installation of pipes for connecting to mains services.
Computers and computer equipment
The scheme only applies to individual computers, or items of computer equipment, that cost £50,000 (excluding VAT) or more. It doesn’t cover something like a network where the total cost of the server and all the computers and printers is £50,000 or more but each individual item is less than £50,000. Nor does it cover computerised equipment (for example, a computerised telephone exchange or computer-controlled blast furnace) or computer software.
Aircraft, ships, boats and other vessels
The scheme applies if you spend £50,000 or more (excluding VAT) on purchasing, constructing, refurbishing, fitting out, altering or extending an aircraft, ship, boat or other vessel.