Value Added Tax, VAT for short, is levied on the sale of nearly all goods and services by businesses. VAT for goods and services is charged at differing levels. The standard VAT rate of 20% is charged on most goods and services. In principle working out how much VAT to pay HMRC seems simple, but it can more complex than you think.
The importance of getting it right first time
It’s comes as no surprise that HMRC are keen for businesses to calculate the correct level of VAT payment correctly the first time round. If not, it causes lots of additional work for them as well as the business owner. Errors on a VAT return can be corrected via VAT assessments, return adjustments or using form VAT652.
There is a surcharge and penalty system in place if HMRC do not receive your VAT return by the deadline or if full payment for the VAT return has not reached their account by the deadline.
3 common VAT mistakes
(1) Pre-registration input tax
One your first VAT return you are allowed to claim back VAT for goods and services that were purchased prior to you becoming VAT registered. Some people forget to include these. Unfortunately, once your first return has been filed, these details cannot be added to subsequent returns.
There are specific time limits set, for what you can claim, for:
- Goods that are still owned by the business, or were used to make other goods that you still own, it is set at four years from the date of registration.
- For services, this set at six months
These figures need to be inputted into Box 4, and you are required to keep copies of invoices and receipts, a description of the purchase and the date it was made and information about how it relates to your business.
(2) VAT schemes
You may not be aware that VAT schemes exist to make calculating and managing VAT easier. This is particularly helpful, if you run a small business, as calculating VAT due every quarter can be time consuming.
Three schemes exist; Cash accounting scheme, Annual accounting scheme and the Flat Rate Scheme.
It’s important that you get advice from an VAT expert before joining a scheme, as there are benefits and pitfalls to each scheme and once you join it is not always easy to leave.
(3) Flat Rate Scheme (FRS)
The Flat Rate Scheme was intended to save people time and money, which is a bonus if you run your own business.
When registering with the scheme you have to choose which category your business falls into and the VAT due is calculated using a fixed rate, typically this is around 14.5%. However, in April 2017, the government added a new category, called ‘limited cost trader’. Anyone who falls into this category (particularly contractors, freelancers and small business owners who are directors of their own limited company) will have to calculate their FRS liability using 16.5%.
In effect, it may be better for some to remain on the standard VAT scheme than join the Flat Rate Scheme.
AJN Accountants offer specialist help for small business owners to ensure that the VAT return is correct.