When the sales turnover of a business reaches the vat threshold, currently 64,000 pounds per annum until reviewed in April 2008, then registration for vat is compulsory. If financially beneficial, businesses can register for vat prior to sales turnover reaching the vat threshold.
When a business registers for vat it becomes responsible for charging vat at the correct percentage on every sales invoice and transfer of goods and services and also maintaining accurate financial accounting records of the vat charged hat are subject to vat inspections. If the sales turnover has breached the vat threshold that business is liable for the vat on sales even if it has not charged the customer.
The vat charged to customers is called output tax and the vat on purchases is called input tax. When a business has registered for vat in addition to maintaining records of sales and input tax it must also keep accurate financial records of purchases and input tax in order to calculate the vat payment to be made. The amount of vat to be paid each quarter is the difference between the sales output tax and the purchases input tax and is paid quarterly to HMRC.
Specific types of business transactions are exempt from vat such as insurance and loans. If the business only supplies exempt items then the business cannot register for vat to reclaim the input tax paid on purchases.
Registering voluntarily for vat when the sales turnover is below the vat threshold is a financial planning decision that each small business should consider. There are both advantages and disadvantages to a voluntary registration and the timing of the registration may also be a feature to be taken into account.
The advantages include being able to reclaim the vat input on purchases which is otherwise lost as a financial cost to the business. If a voluntary registration is taken up then value added tax has to be included on all future sales invoices.
If the majority of customers are already vat registered themselves then registering does not normally affect sales volume and can increase the credibility of the business. Charging vat to non vat registered clients such as members of the public would increase the amount being charged and make the small business less competitive.
When a business moves from being non vat registered to being vat registered changes may have to be made to the bookkeeping records being maintained. Not normally a problem if accounting or bookkeeping software is being used provided the financial system employed can fulfil the enhanced requirements being vat registered.
The accounting requirements of being vat registered require the business to issue vat invoices which show the name and address of the business, the vat registration number, sales invoice date and the vat being charged. An accounting record must be kept of all sales invoices issued in a format that permits a subsequent audit check when the customs and excise visit to conduct an audit check of the vat records.
In relation to purchase invoices and reclaiming the vat input tax vat may only be reclaimed on those invoices for which the business has a vat purchase invoice. A valid vat purchase invoice contains the vat number of the supplier who issued the invoice. A bookkeeping record is required of all purchase invoices from suppliers clearly showing the output tax being reclaimed.
Valuew added tax returns are prepared quarterly and sent before the end of the following month. If registered for the online service vat returns can be filed online. There are benefits to filing the tax return online in that many businesses may receive up to 7 days longer than normal to file the vat return if the vat payment is being made electronically.
There are penalties for failing to submit the vat tax return on time and interest may be charged on the outstanding amount. When a vat return is not submitted on time an assessment may be raised which has to be paid as a legal debt until such time as the return is submitted and the amount due corrected.
It is important to submit the vat return on time even if there is a problem paying the full amount. Failing to submit on time brings the business to the attention of the tax authority that is more likely to inspect and investigate persistent offenders. A business can be expected to receive an inspection every three years however in the worst case scenario of a delinquent vat registered business the customs and excise could inspect every quarter.
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Terry Cartwright of DIY Accounting designs Small Business
Accounting Software that automates the quarterly
Vat Return for self employed businesses and small companies including the vat flat rate scheme producing tax returns and financial accounts.
