VAT is a tax
on the final consumption of goods and services which are not
zero rated. Vat registration is not compulsory for a self
employed business until total sales reach the vat threshold.
Vat Threshold
The vat threshold is
set each year with changes announced in the March budget. The
vat registration threshold applicable from 1 May 2009 is £68,000 p.a.
When sales turnover
reaches the vat threshold in a 12 month period vat registration
is compulsory and after registering for vat the business adds
vat at the standard vat rate to its sales invoices. The total
vat output charged to the customer is collected by the business
and paid to HMRC at regular intervals, quarterly being common
practise. After vat registration the business can also
deduct vat on purchases from the vat on sales.
Failing To
Register For Vat
If a business fails
to register for vat when trading above the threshold HMRC rules
state that business is still liable for the vat output liability
at the appropriate vat rate even if the business has not
increased its selling prices to charge customers the value added
tax. If sales have exceeded the vat threshold due to exceptional
sales which may not be repeated vat registration can be avoided
provided HMRC are advised the threshold has been exceeded and
will not be maintained above the threshold.
Voluntary Vat
Registration
If the main
customers of the business are not vat registered such as members
of the public adding vat to prices makes those goods and
services less competitive and it is therefore preferable not to
be vat registered. Value added tax on purchases cannot be
reclaimed and is borne by the business as a cost by unregistered
businesses.
When clients are
generally vat registered and can reclaim the vat charged adding
vat does not render the goods and services supplied
uncompetitive and so voluntarily registering for vat has the
advantage of enabling the business to reduce costs by being able
to reclaim vat input on purchases.
Vat Flat Rate
Scheme
The vat flat rate
scheme is designed to simplify vat by businesses with a sales
turnover under £150,000. Vat is still charged to customers at
the standard vat rate but the amount paid to HMRC is calculated
at a lower vat rate which varies according to the type of
business. Vat on purchases cannot be reclaimed against the flat
rate liability.
As the flat rate
percentage is the business type average liability it tends to
only be a financial advantage if purchases are less
proportionately than average. HMRC offer a 1 percent reduction
in the flat rate for the first year registered and so timing
when the flat rate scheme might be adopted is important since
first year purchases tend to be higher than normal making a
delay before adopting the flat rate more beneficial.
Reclaiming Vat On
Purchases Made Before Vat Registration
After vat
registration the vat paid on purchases of goods and services
prior to registration can be claimed against vat output
liability. Vat paid on services can be claimed up to 6 months
prior to registration provided those services were not used
prior to registration. Vat on goods can be claimed up to 3 years
before registration provided those items are still stock or
assets at the time of vat registration. These rules basically
allow a business to match its first vat sales with items bought
before but sold after registration.
Self employed
accounts and company accounts can be used by both vat and non
vat registered business.
Businesses can
register for vat online at:
VAT Online Registration Service
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