VAT Issues

Should I Be Registered for VAT?

VAT registration threshold

If you're in business, you must register for VAT if your VAT taxable turnover for the previous 12 months is more than £83,000. This figure is known as the 'VAT registration threshold'. The threshold changes - usually once a year announced in the Budget - so you should regularly check your turnover against the current threshold. You must also register for VAT if either of the following applies:

you think your VAT taxable turnover may go over the threshold in the next 30 days alone
you take over a VAT-registered business as a going concern

Value Added Tax (VAT) is a tax charged on the sale of most goods and services. Examples of taxable supplies include sale of goods, hire purchase, rental, exchange, and gifts in kind. These are charged at one of three rates:

Standard rate 20%
Reduced rate 5%
Zero rate 0%

Annual Registration Limit - from 1.4.16 £83,000 (1.4.15 - 31.3.16 £83,000)

Annual Deregistration Limit - from 1.4.16 £81,000 (1.4.15 - 31.3.16 £81,000)

Deregistration threshold

The deregistration threshold is £81,000. If your VAT taxable turnover for the year is less than or equal to £81,000, or if you expect it to fall to £81,000 or less in the next 12 months, you can either:

stay registered for VAT
ask for your VAT registration to be cancelled
If you decide to stay registered, you don't have to do anything.

If you want to cancel your VAT registration you must write to HMRC to explain why your turnover has fallen. For example, you might have reduced your opening hours or lost contracts. You'll also have to give an estimate of your turnover for the next year.

Remember that your VAT taxable turnover includes only the goods and services you sell that you have to charge VAT on, even those that are zero-rated. It doesn't include sales that are exempt or outside the scope of VAT.

What is the cash accounting scheme?

The Cash Accounting Scheme allows you to:

pay VAT on your sales when your customers pay you
reclaim VAT on your purchases when you have paid your suppliers

This is different from standard VAT accounting, whereby you:

pay VAT on any invoices you have issued, even if you have not received the payment from your customer
reclaim VAT on any invoices you have received, even if you have not yet paid your supplier

You can use the Cash Accounting Scheme if your estimated VAT taxable turnover during the next tax year is not more than £1.35 million. Your VAT taxable turnover includes any standard, reduced and zero-rated sales and other VAT taxable supplies, but excludes VAT itself, supplies that are exempt from VAT, and capital asset sales.

Once you start to use cash accounting, you can continue to do so until your VAT taxable turnover reaches £1.6 million.

You cannot use the Cash Accounting Scheme if:

you are not up-to-date on your VAT Returns and VAT payments
you have been convicted of a VAT offence or charged a penalty for VAT evasion in the last year
your VAT taxable turnover is over £1.35 million per year

Even if you use the Cash Accounting Scheme, you must still account for VAT using standard VAT accounting when you:

buy or sell goods using lease purchase, hire purchase, conditional sale or credit sale
import goods or acquire goods from other EU states
remove goods from a Customs warehouse or free zone
issue a VAT invoice that isn't due to be paid for six months or more
issue a VAT invoice in advance of providing goods or services

When might I face a VAT penalty?

A penalty may be issued whenever there has been a significant or repeated lack of care in preparing VAT returns, leading to errors in the true amount of tax payable or repayable.

Where you submit an inaccurate VAT return which:

shows too little tax due; or
claims a repayment which is too large;
you may be liable to MP or MP(R).

Where:

you have not submitted a return; and
we assess you for the tax due for the period; and
you fail to tell us within 30 days that the assessed amount is too low;
you may be liable to MP (but not MP(R)).

However, both of these penalties are subject to objective tests.

What is the VAT penalty rate?

As well as the increase in the standard rate of VAT from 17.5% to 20% on 4 January 2011, HMRC are also replacing the present default surcharge fines, at some time in 2011, with new penalties.

The penalties will be applied to two situations:

Late submission of a VAT return, and
Late payment of VAT due.

Late filing of quarterly returns

Initially late filing will attract a penalty of £100 immediately after the due filing date. The fine will be payable even if the liability on the return has been paid and for the first time VAT returns that show a refund of VAT will also be subject to the late filing penalty. Any subsequent returns filed late within a year of the first return being filed late, will be charged £200 for the second, £300 for the third and £400 for the forth and subsequent returns.

Returns still outstanding after 6 months and again after one year will be charged an additional penalty based on 5% on the VAT due on the return.

If taxpayers withhold information that prevents HMRC from raising a correct assessment, there is a tax geared penalty of up to 100% of the VAT due.

Late payment of VAT

The first late payment does not attract a penalty but starts a penalty period of one year. Subsequent late payments within the penalty year will result in a fine based on between 2% and 4% of the VAT due.

I would like to know when purchasing goods and services, which have VAT added and which don't.

VAT is charged on sales and other supplies

If you are registered for VAT, you must charge VAT on all supplies of goods and services that you make within the UK, at the appropriate rate, unless they are specifically either exempt from VAT or outside the scope of UK VAT.

If VAT has been added, traders are obliged by law to show this on your receipt.

The exact method varies - if you have your car serviced, you would expect to see the amount of VAT set out separately and the rate shown. If you go to a supermarket, they may just indicate by putting a star against the VAT registered items.

A Valid VAT receipt must show the VAT registration number, which is nine digits long.

In addition to charging VAT on the goods and services that you supply to your customers, you must account for and pay VAT on:

items sold to staff, such as canteen meals or via vending machines
sales of business assets
hiring or loaning of goods to someone else
commission received from selling something on behalf of someone else
certain business gifts
goods that you or your staff take out of the business for personal use, whether on a temporary or permanent basis
services supplied to the business but then used privately

VAT is also chargeable on:

barter
part-exchange
gifts
samples

Supplies you don't need to charge VAT on

You do not have to account for, or pay VAT on the following.

Supplies that are exempt from VAT or outside the scope of VAT

Find out more about what's exempt from VAT or outside the scope

Free samples of goods

If you give a free sample of your goods to another person or business you don't have to charge VAT in certain circumstances.

Find out when you have to account for VAT on samples

Free loans of business assets

If you make free loans of business assets to your customers then you don't have to charge VAT on the loan as long as the cost of hiring the asset is included in the price of something else you sell to your customers. For example, where you sell tea, coffee, water etc and you provide for 'free' a vending machine for these items and none of your customers pays extra for the machine.

Free goods

You do not have to account for VAT on business gifts made to the same person where the total cost of all the gifts does not exceed £50 in any 12-month period.

Find out more about the VAT rules for business gifts.

Free services

You don't have to account for VAT on genuinely free services that you provide. You must not receive any payment, goods or services in return.