Vat Schemes and Vat ThresholdsTerry Cartwright
October 10, 2007
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Vat Registration Businesses become liable for vat when sales reach the vat threshold set
on 1st April 2007 at £64,000 p.a. regardless of whether that business
has registered for vat purposes.
Businesses whose customers are vat registered should consider opting
for voluntary vat registration as sales would not be affected by vat
registration and registering would permit that business to also reclaim
vat input tax on purchases. Businesses with mainly non vat registered
customers may wish to delay vat registration until the point is reached
at which liability to vat tax becomes inevitable. Consideration should
be given to maintaining sales below the vat threshold provided this
does not result in a significant loss of profit. When the vat threshold
of £64,000 p.a. is exceeded Customs & Excise should be advised. It
may be possible to delay vat registration if sales breached the vat
threshold due to an abnormal sales period that may not necessarily be
repeated in the foreseeable future.
Having reached the point of vat registration consideration should be
given to the various vat schemes which are available to either simplify
the vat calculation or smooth the vat tax liability.
Choose the right vat scheme for your business Unless a vat scheme is adopted then the standard inputs and outputs vat
scheme would be applied. This involves charging all customers vat on
sales known as output vat and paying this amount to the Vat office each
quarter. Vat Registered businesses can also deduct from the vat
liability the input vat on purchases that suppliers have charged the
business. It is important to ensure all sales and purchase invoices are
retained and an audit trail from the individual transactions to the vat
tax liability is maintained as Customs & Excise do inspect vat
records, the frequency of those visits, often once every three years
can increase dramatically if the vat records are considered inadequate.
Accounting Software can provide a solution to record keeping and DIY
Accounting produce automated vat calculations from the basic data entry
of sales and purchases on excel spreadsheets.
Vat Schemes
Vat Flat Rate Scheme The vat flat rate scheme can be adopted by businesses that have an
annual turnover excluding vat of under £150,000 p.a.
Instead of paying the difference between vat on sales and vat on
purchases businesses that have adopted a vat flat rate scheme pay vat
at a percentage of sales in line with the average for that trade
sector. Vat is not reclaimable on purchases under the flat rate scheme.
The Customs & Excise website contains details of the vat flat rate
percentages for each sector.
Customers are charged vat at the normal vat rate, 17.5% if standard
rated goods. The actual vat payable is then calculated at the
appropriate percentage of the total sales figure including vat. An
adjustment to the accounts would then be required to adjust for the
difference between the vat paid and the amount payable if an inputs and
outputs basis had been used. DIY Accounting software automates this
flat rate calculation by automatically calculating the vat on sales at
the flat rate and expensing the vat input to the purchase accounts.
Businesses in their first year of vat registration also receive a 1%
reduction in the vat flat rate for their trade sector which can save
tax.
Annual Vat Accounting Scheme Not suitable if you receive repayments of vat, the annual accounting
scheme is based upon an annual estimate of the vat bill which is then
paid in monthly or quarterly instalments throughout the year with the
balance payable or received at the end of the year when the annual vat
return has been submitted.
The vat threshold for this scheme is businesses with a sales turnover
not expected to exceed £1.25m.
The main benefit of the annual accounting scheme is to smooth the vat
payments over the year.
Vat Cash Accounting Scheme Under the vat cash accounting scheme the vat return and liability to
pay vat is based upon the date sales were received and the date
purchases were paid rather than the invoice tax points.
The vat threshold for the cash accounting scheme is businesses with a
sales turnover excluding vat of under £1.35m.which can be extended for
existing users to a turnover of £1.6m and left in place for up to 6
months after the vat threshold has been breached.
Accounting for vat using the Cash Accounting Scheme may require
businesses to record sales and purchases on cash received and paid
basis and adjust accounting records for accruals. Alternatively, sales
and purchases can be entered into the Accounting records based upon the
invoice tax points and a quarterly adjustment made for debtors and
creditors at the beginning and end of each quarter. Such accounting
adjustments would not be suitable for everyone.
Vat Retail Schemes Retailers selling to the general public may not easily be able to
produce vat sales invoices to individual customers and there are
various vat retail schemes available on the Customs & Excise
website that retailers can adopt.
The main benefits of the vat retail schemes are to dispense with every
customer being issued a vat invoice unless requested.
Vat retail schemes can be used in conjunction with both flat rate
schemes and the annual vat accounting scheme.
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