VAT registered businesses act as unpaid tax collectors for HMRC, tasked with accounting accurately for all tax they collect. The system is complex, and HMRC enforces it rigorously with significant penalties for errors. Unfortunately, HMRC rarely accepts ignorance as an excuse.
At Horsfield & Smith, we believe the right guidance makes managing VAT straightforward. Our expert accountants in Bury will walk you through the key aspects of VAT, with a particular focus on simplifying schemes like the VAT flat rate scheme.
If you have any questions after reading, please don’t hesitate to get in touch with our dedicated team.
What is VAT and how does it work?
VAT (Value Added Tax) is a tax on consumer spending. Registered businesses charge it on their goods and services.
- Output tax: This is the VAT you charge on your sales.
- Input tax: This is the VAT your business pays on its purchases.
You deduct your input tax from your output tax and pay the difference to HMRC. If your input tax is greater, you reclaim the difference. Remember, you cannot reclaim VAT on some expenses, like business entertainment or most car purchases.
When must you register for VAT?
VAT registration is mandatory if your taxable turnover in the last 12 months exceeded the £85,000 threshold. You must complete this VAT registration within 30 days.
You can also choose to register voluntarily if your turnover is lower. This is beneficial for reclaiming VAT on startup costs or if your business makes zero-rated supplies.
An overview of VAT accounting schemes
HMRC offers several VAT accounting scheme options to simplify VAT. The right one depends on your business type and annual turnover.
The flat rate scheme
The VAT flat rate scheme is designed for small business owners with a taxable turnover of £150,000 or less. Its main benefit is simplicity: you pay HMRC a fixed percentage of your total turnover instead of tracking every purchase and sale.
This percentage varies by industry. While you usually cannot reclaim VAT on purchases (except for certain capital assets), the lower administrative burden and potential to reduce your overall amount of VAT paid can make it very attractive.
Are you a limited cost trader? Businesses with minimal goods purchases (like many service-based firms) are called ‘limited cost businesses’ and use a higher flat rate of 16.5%. It’s crucial to check which category you fall into.
Is the flat rate scheme right for you? Our business advisory team can run the numbers and advise if joining the scheme would be more beneficial than standard VAT accounting.
Other key schemes
- Annual accounting scheme: Submit one VAT return annually instead of four, making interim payments. This aids cash flow and reduces administration.
- Cash accounting scheme: Only pay VAT to HMRC once your customer has paid you. This helps businesses with slow-paying clients or cash flow challenges.
- VAT retail schemes: These schemes help retailers selling to the public by simplifying VAT calculation on a high volume of low-value transactions.
Navigating VAT compliance and making tax digital
Staying compliant means keeping complete, up-to-date digital records. HMRC requires all VAT-registered businesses to maintain digital records and file returns using MTD-compatible software under its Making Tax Digital (MTD) for VAT rules.
Our outsourced bookkeeping services handle this for you. We ensure your records are accurate and submitted on time, helping you avoid penalties for late filing or errors.
How Horsfield & Smith can help with your VAT
We provide strategic advice to ensure your business is VAT-efficient, not just compliant.
We can assist you by:
- Providing expert advice on which VAT accounting scheme is most beneficial for your small business.
- Tailoring your accounting systems to ensure VAT information is accurate and MTD-compliant.
- Completing and submitting your VAT returns accurately and on time.
- Offering support during HMRC enquiries and negotiating on your behalf.
- Guiding you through MTD for VAT, ensuring your software is compliant.
Get expert VAT advice today
VAT doesn’t have to be a source of stress. Whether you’re considering VAT registration, struggling with MTD, or want to check if the VAT flat rate scheme could save you money, we’re here to help.
Contact our team of VAT specialists in Bury today for a friendly, no-obligation conversation. Call us on 0161 761 5231 or send us a message online.
