By Sue Redmond, Partner, Lloyd Piggott Chartered Accountants
I have worked at Manchester based chartered accountants Lloyd Piggott as a partner for over 20 years now, and here, in this article, I am going to dispel five common queries surrounding the complex subject of VAT and explain some of the complicated jargon that can often leave us confused.
- VAT: value added tax that's charged on most goods and services that VAT-registered businesses provide in the UK
- HMRC: Her Majesty's Revenue and Customs is a non-ministerial department of the UK Government responsible for the collection of taxes, the payment of some forms of state support, and the administration of other regulatory regimes including the national minimum wage
- Accounting or tax period: the period of time stated in your VAT return, which is usually three months
- Zero-rated: is a taxable supply subject to UK VAT at a rate of 0%
Five top tips:
1. VAT registration limit:
The VAT registration threshold is £81,000 from 1st April 2014. This means if your taxable income has gone over this limit within the last 12 months, you must register for VAT. However, what you may not realise is that you must revisit this turnover limit on a rolling 12 month basis. You do not start from nil at the start of a new tax year or once your accounts year has come to an end. This could mean that you have gone over the VAT threshold during the year and missed your chance to do anything about it.
The best solution is to keep a spreadsheet of your monthly turnover, set up to calculate your rolling turnover. If you are close to the threshold and need advice, contact your accountant.
2. Reclaiming costs:
If you bought goods or services before you registered for VAT, you may be able to reclaim the VAT you paid on them. You can generally reclaim VAT on goods you bought up to four years before you registered as long as they were for business purposes and you still hold them on the date of registration. This is particularly useful if you had to spend significant amounts on equipment before you could start to trade. As long as you have kept the receipts, you can reclaim the VAT and reduce the amount owed on your first VAT return - or it may even be a refund! Any VAT on services you have bought six months before registration can also be reclaimed as long as they are for business purposes.
3. VAT relief:
You can also claim back VAT on some costs incurred after you have deregistered. You can claim relief for VAT on services supplied to you after your registration was cancelled, as long as these services relate to the period when you were VAT registered. Examples could include services provided by a solicitor or an accountant.
4. Beware of the flat rate scheme:
This can offer a simple and cost effective way of calculating your VAT liability but businesses need to take certain factors into consideration before committing to it. Under this scheme you apply the reduced flat-rate percentage to all business income, but what most people don’t realise is this rate must also be applied to income that is exempt or zero-rated. Not doing this could leave you significantly out of pocket.
For example, let’s say a sole trader runs a shop for which he is VAT registered. He also owns a house which he rents out. The rental income is exempt from VAT, but as he is the VAT registered person (not the business) under the Flat Rate Scheme he must pay VAT from both the shop and the rent.
5. International trade VAT:
Many businesses worry about red tape associated with trading abroad. Putting the right systems in place can help you take the opportunities that international trade offers.
If you sell, supply or transfer goods and services out of the UK to traders registered for VAT in other EC member states you will need to file an EC Sales List (ESL). The information you provide will be used by other EC member states to make sure the VAT has been correctly accounted for.
If you plan to export goods to countries outside the EU you will need to get an identification number to deal with EU custom authorities. This number is known as an Economic Operator Registration and Identification Number (EORI).
If you have any questions about VAT or would like further advice, please contact Lloyd Piggott on 0161 236 7677 or visit the website.