Compulsory VAT Registration & The Different Schemes
A business must register for VAT when they expect their VAT taxable turnover (i.e. the total value of everything you sell that is vatable) to exceed the registration threshold (currently £90,000) in any 12 month period. When this happens, you must register within 30 days of the end of the month when you exceeded the threshold.
You are also required to register for VAT if you expect to go over the threshold in a single 30 day period. You must register in this instance by the end of that 30 day period. You will also have to register for VAT if you buy goods from EU VAT registered suppliers to use in your business and their worth exceeds the threshold.
If you fail to register for VAT on time, you may get a penalty and you will have to pay VAT on any sales you have made from the point when you should have registered.
The standard VAT accounting method is to pay VAT on your sales invoices and reclaim VAT on your purchase invoices. But there are other VAT schemes that may be available to your business. Here are just some of these;
Flat Rate Scheme
Under this scheme your business will charge VAT on its’ sales invoices at a rate of 20%. However, the rate of VAT that is paid to HMRC will be a fixed rate percentage of the business’ VAT inclusive sales. This rate is dependent upon the business type and is set by HMRC. The business keeps the difference between the VAT charged to the customer and the VAT paid to HMRC. However, any VAT that is incurred on business expenses will not be reclaimable from HMRC under this scheme (except for certain assets over £2,000).
To be eligible your expected VAT taxable turnover must be less than £150,000 in the next 12 months. You must apply to HMRC to operate this VAT scheme.
Cash Accounting Scheme
Under this scheme a business pays VAT on sales when a payment is received and reclaims VAT on purchases when a payment is made. However, this scheme cannot be used on certain transactions, such as when the payment terms of a VAT invoice is 6 months or more, a VAT invoice is raised in advance, or when goods are imported into Northern Ireland from the EU.
To be eligible your estimated VAT taxable turnover must be less than £1.35 million in the next 12 months. You do not have to tell HMRC that you are using this scheme.
Annual Accounting Scheme
Under this scheme a business submits one VAT Return each year and make advance payments towards their VAT bill based on the last VAT Return that was submitted.
To be eligible your expected VAT taxable turnover must be less than £1.35 million in the next 12 months and you must apply to HMRC to operate this VAT scheme.
Not all businesses are eligible for the VAT schemes mentioned above and it is important to consider the nature of your business and what works best for it.
Kerry Donaghy is a Chartered Accountant at Abac Chartered Accountants.
This article is for general information only. You are recommended to seek professional advice before taking action on the basis of the contents of this article.
