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Suitability of
Accounting Packages For Non Vat Registered Sole Traders
Value added tax is a tax
on the final consumption of certain goods and services. Vat at
the standard rate is added to the selling price of all goods and
services which are neither exempt nor zero rated by businesses
whose gross sales exceed the vat threshold limit.
The sole trader accounts package
is suitable for self employed business that are not vat registered and whose
sales are unlikely to reach the vat threshold during the financial year. If the
vat threshold is likely to be exceeded during the tax year then the
self
employed accounting package would be more suitable as the self employed
accounting spreadsheets can be easily adjusted to account for either non vat
registered business or businesses that become vat registered during the
financial year.
The vat threshold is the level of
gross sales income at which a business becomes liable to pay vat out on all
sales generated. Businesses that exceed the vat threshold are liable to pay vat
on the gross sales at the standard rate of 17.5% unless the goods supplied are
exempt or zero rated, regardless of whether the sole trader is registered for
vat or not. The vat registration threshold is set each year in the March financial budget and
was £64,000 for the financial year 2007-08 and increased to £67,000 for the
financial year commencing April 2008 and further to 68,000 in the April 2009
budget with effect from 1 May 2009.
When a business registers for vat
that small business is then permitted to add vat output to the sales value and
may also reclaim vat input on purchases against the tax liability.
Sole traders whose sales turnover
reaches the vat threshold should register for vat unless sales turnover has been
exceptional and not likely to be repeated on an ongoing basis. In those cases
HMRC should be notified that while the vat threshold has been breached vat
registration is not being proposed as the sales that caused the threshold limit
to be exceeded were exceptional and unlikely to be repeated in future trading
periods.
When a business is not registered
for value added tax purposes no vat is added to the sales price. Goods bought
from suppliers may include vat input and this tax is treated by the business as
a cost. The total purchase price including value added tax being included in the
bookkeeping records of expenses. The sole
trader accounting spreadsheets do not include separate columns for vat inputs or
outputs since neither are required.
Where business turnover is under the
vat threshold vat registration with HMRC is not required although vat
registration can be voluntarily below the threshold level. Where a business
sells the majority of its goods and services to the general public it is usually
advantageous not to register for value added tax until it cannot be avoided.
Where a small business customers are registered for vat then it is often
desirable from a financial standpoint to register voluntarily as sales
are not affected by adding value added tax to the sales invoices and the vat input paid on
purchase invoices can then be reclaimed against the additional vat income
raised.
If the
sole trader is certain
that the business will not be registered for vat then the sole trader accounts
package is suitable. Businesses that are not registered for vat do not need to
keep vat records. A business that is registered
for vat not only needs to keep vat records to support the quarterly vat
return but must also maintain a value added tax audit trail to support the quarterly tax
return should the accounting records be subject to a
vat inspection by
HMRC.
If the business is close to the
vat threshold or may exceed the vat
registration threshold limit during the financial year or
voluntary vat registration is being considered then the self employed accounts
would be more suitable as while the sole trader accounting spreadsheets are only
suitable for non vat registered business the self employed accounting
spreadsheets are designed to be suitable for both vat and non vat registered
business.
Further guidance is available from
the HMRC website value added tax portal at:
http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal
"Self
employed sole traders accounting spreadsheets under the vat threshold limit with
a non vat registered business for value added tax"
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DIY accounting software, tax
accounting, payroll software, limited company formation UK 
