Do you feel like you’re on a rollercoaster when it’s time to complete your value added tax (VAT) returns? 
 
There’s what you have paid, what you have charged, and what rates apply. It can all be very confusing.  
 
Managing your VAT is one of the ways a bookkeeper can really help to save valuable time for you. 
 

Who pays VAT? 

VAT is a consumption tax that we have paid in the UK since 1973. In 2018/19 HM Revenues and Customs (HMRC) collected over £132billion of VAT which makes it the third largest source of tax revenue. 
 
VAT applies to most goods and services we buy from businesses registered in the UK as well as things imported from within the European Union (EU) and some things from outside the EU as well. 
 
No wonder it’s all quite complicated. 
 
In 2017 the Office of Tax Simplification published a report on streamlining VAT. Some EU VAT ‘quick fixes’ were adopted in December 2018 that have applied since 1 January this year. However, VAT is still difficult to understand in many cases. 
 

Should my business be registered for VAT? 

Your business, partnership or group of companies should be registered for VAT if your taxable turnover is approaching or likely to be more than £85,000 during a rolling 12-month period. 
 
You can register for VAT online, using your business tax account, but your bookkeeper can act as your agent and do this for you. 
 
Once you are registered, HMRC will provide a VAT registration certificate, confirming: 
your VAT number 
when you should submit your first VAT return and payment 
your ‘effective date of registration’. 
 
You will need your VAT number before you can charge or show VAT on your invoices. Your bookkeeper can tell you whether you will need to make an extra allowance for VAT during your first payment period. You might need to explain to your customers that you are registering for VAT and make an additional charge to cover it. Once you have your VAT number you will need to reissue your invoices to show the VAT. 
 
From your ‘effective date of registration’, you must: 
charge the correct VAT 
pay VAT that’s due to HMRC 
submit VAT returns 
keep VAT records and use a VAT account 
in most cases, follow HMRC’s Making Tax Digital for VAT rules. 
 

How much VAT should I charge? 

Different rates of VAT apply, and this is why a lot of business owners find VAT difficult. Currently, the basic rates of VAT are: 
VAT type: 
Rate: 
Applies to: 
Standard 
20% 
Most goods and services. 
(from 15 July 2020 to 12 January 2021) 
5% 
Supplies for hospitality, hotel and holiday accommodation and admission to certain attractions. 
Reduced 
5% 
Some goods and services such as child seats and home energy for example. 
Zero rate 
0% 
Some goods and services such as food and children’s clothes. 
Exempt 
— 
Such as postage stamps, insurance, TV licenses, medical care, financial and property transactions. 
It can be confusing because zero-rated sales and purchases have VAT on them, but the rate is 0%. On the other hand, for purchases that are exempt, no VAT is charged. However, both these types of transactions still need to be declared on your VAT return. 
 

What is flat rate VAT? 

The amount of VAT you pay or claim back from HMRC is usually the difference between the VAT charged to your customers and the VAT you pay on purchases. 
 
The Flat Rate Scheme works differently because you pay a fixed rate of VAT to HMRC and keep the difference between VAT you charge your customers and the VAT you pay. You can’t reclaim the VAT on your purchases, except for certain capital assets. 
 
You must apply to HMRC to join the scheme, which only applies for businesses with a taxable turnover of £150,000 or less (excluding VAT). 
 
Depending on your business, a different VAT rate will apply if you only spend a small amount on goods. If you qualify as a ‘limited cost business’ you will pay VAT at 16.5%. Your bookkeeper can explain which goods count as costs. 
 
If you don’t qualify as a limited cost business, the type of work you do will define your flat rate VAT. This can range temporarily from 0% for hotels or accommodation (between 15 July 2020 and 12 January 2021) to 14.5% for computer and IT consultancy or data processing, for example 
 
 
If the ups and downs of completing your VAT returns are making you dizzy, please get in touch
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