What is VAT?
Value Added Tax (VAT) is a tax that calculates the increase in value of a product or service. The difference between wholesale and retail prices are taxed at every step of the way on the supply chain, until it can be distributed to either consumers or other businesses.
VAT is a consumption tax – it’s what you spend on things like food and entertainment. However, because VAT comes from the government rather than being collected by individual businesses there are some key differences between your taxes if they make goods or provide services to other companies in Europe; this article will cover those basics.
So, how does a consumption tax work?
VAT is a tax that’s applied to what people consume. It can be considered an indirect form of taxation because businesses are required by law and regulation (in this case the European Union) to register for VAT before they sell their goods or services if their turnover exceeds certain limits - £85K GBP ($130k USD). The UK has had this system in place since 1991 and currently taxes most goods and services at 20%. There are some exceptions including children's clothing that attract no VAT rate due to its exemption from sales or purchase activity within the UK.
The UK government has introduced a new law that requires all businesses with turnover greater than £85K to register for VAT. If you find yourself asking the question, “Should I become VAT registered?” know that failure in registering online or by using form number VA1 could result in fines from HMRC.
If your business has a turnover of £85k or more over the past 12 months AND there is an expectation that it will reach this amount in a year too... then YES—it makes sense for them to get their act together and register with HMRC!
Advantages of VAT Registration
Being VAT registered offers many advantages, one being the ability to recover startup costs. Say you're opening a café or starting your own professional service company and need chairs for clients as well as desks with computers in order to do their work effectively! You can reclaim some of these expenses from HMRC so that they don't go towards tax. One can reclaim their tax element from HMRC in order pump this money into business before waiting until its turnover exceeds £85k ($130K).
Many businesses would prefer their clientele or suppliers not knowing how much turnover there really are at any given time.
On the other hand, some businesses prefer their clients thinking big of them (£85k + turnover) as it creates this image of gravitas/professionalism for business owners.
Disadvantages of VAT Registration
One disadvantage of being VAT registered is that every quarter, you have to send in your returns. This can be inconvenient for some businesses because they might not like the idea of sending these documents back all the time or keeping up with what paperwork needs to be sent when an accountant is needed (every year).
There are pros and cons when filing an annual return. Some businesses like the fact that they have to keep their books up-to-date, while others find this extra administration inconvenient. Filing for VAT can be challenging if you don’t know what country tax laws apply in your industry or marketplace; however, most companies typically charge customers accordingly (in many instances) so it's not too much of an issue - just make sure before inputting anything into a system as there could changes from one line item to another without warning!
The best way to determine the right scheme for you? Consult an accountant. However, there are many different options available and it can be difficult to know which option is most appropriate in such a confusing market environment that we're living through currently! Here's just some of what your financial advisor might recommend:
Annual Accounting VAT Scheme (AA)
AA is ideal for highly profitable businesses whose sales total more than £1.35 million yearly. It can also be an option if you don't want to keep records of your VAT invoices or returns or if your business typically has high annual outputs (profits).
It's straightforward and easy-to-use but it’s also relatively expensive at a time when most businesses can least afford it.
VAT Flat Rate Scheme (VFRS)
The VAT Flat Rate Scheme is one of the best known and most widely used tax avoidance schemes. This type is popular among small to medium businesses and service providers, because it's specific to those who spend small amounts on goods or raw materials - such as when you're buying something from a company and they give discounts for purchasing in bulk quantities.
VFRS is highly popular with most small businesses as it's easy to use and allows for adjustments. If your company is liable to pay VAT and/or you would like to claim back VAT as a business, then this scheme could be best for you.
Under the rules of VAT, a new category has been introduced called “limited cost traders”. These businesses are labour-intensive ones - essentially those that spend less than 2% of their sales on goods (not services) in an accounting period. They cannot include purchases for capital goods like new equipment unless it's hiring out vehicles or parts themselves.
The VAT Cash Accounting Scheme is a great way to manage your company's cash flow. With this scheme, you can only pay in full when it comes time for payment from customers - so there are no more worries about waiting until bills come due and then scrambling with what little money is left over after all suppliers have been paid!
The downside? Well like VFRS; if that £1.35 million or less applies as well--you're good to go ahead and enrol yourself right away (and don't forget the accountant!), otherwise the scheme is inapplicable.
A variety of tools are available to help inform you of where you stand.
Sale Price Calculator
This calculator will tell calculate sales prices based on certain conditions like weights/volumes or per item markdowns etc., as well as providing information about how much tax should have been collected at each point during business transactions. This is a free calculator which doesn't require a financial advisor to compute it.
Total Turnover Calculator
This tool will tell you what your annual turnover or income should be based on certain business elements, such as your average ticket size and the number of transactions done annually. It's another free service that can easily be used without any assistance.
This calculator is used to determine the exact amount of tax to charge and input into your system. Once filled in, you can instantly see what VAT content should be for each transaction.
It’s recommended to hire the services of an accountant who will be able to offer advice across all areas of your financial plan. Taxes are often complicated but with the help of experts, it doesn't need to cause you stress.
Before you can register your business for VAT (value-added tax), you will need to possess several key documents:
- A National Insurance number or a ‘tax identifier’ which acts as a reference for all taxpayers
- A certificate of incorporation
- Details of businesses you have associated with over the past two years
- Details of transferred/acquired business
- Bank account details
Registering for VAT online can be done in a few simple steps. For starters, you need to have an active e-VAT account with Her Majesty’s Revenue & Customs (HMRC). You will also want to provide some information about your business like name and address on the appropriate form(s). Once all this is submitted then wait until it prompts “was received successfully processed by system n° etc., as well as date stamp approved!
Alternatively, you can fill out and submit a paper form by downloading it online from HMRC's site. The form needs an official signature before being submitted.
When you register for VAT, the system will create a Government Gateway account and send your certificate. You should receive it within 30 days of creating an online profile (or up to 3 months). Your first return is due on or before quarterly deadlines - usually, there’s an automated reminder about when these are so they don't slip past unnoticed!
It's important to note that you should start your VAT accounting from the date at which you realised, or were made aware of being in receipt for over £85K (or decided on a voluntary basis).
Checking for VAT Registration
It is important for business owners to check if the company they are working with is VAT registered. Businesses will often send invoices with a tax added onto them, which can be an expensive mistake if it turns out that the supplier has been incorrectly adding this charge or charges too much in total after all fees have been taken into account.
When it comes to ensuring that you don't get taken advantage of in the marketplace, understanding if a company is VAT registered and what its business structure looks like can be invaluable. One way for individuals or small businesses looking into this topic would be by calling HMRC's Helpline number (0300 200 3700).
What does Making Tax Digital mean for VAT?
HMRC describes this major change as “a key part of the government’s plans to make it easier for individuals and businesses to get their tax right.” It will end up with millions submitting taxes every year. Businesses that have a taxable turnover above £85k or more must use compatible software applications like X company's product Y if they want their records accurately documented.
The UK’s VAT rules are changing and all businesses under the threshold will have to use software from April 2022. This is a major shift for those who haven't previously been required to file electronically, including many small-business owners in your community! In order not to get caught off guard by this change:
- Review how often you should update or migrate tax records before then.
- Make sure that everything on personal computers linked into company systems has backed up securely where possible.
To sum up
It's important that you take your time and research all available options in order to ensure success when entering this new marketplace as well as avoiding any penalties or fees associated with delayed registration due to lack thereof - these are things no business wants!
Accountancy Cloud is here to make your life easier. We have accountants who are experts in company tax and understand all of the necessary regulations that you must adhere to! Contact us today for a chat about what we can do for you.
We offer both personal assistance with any queries related directly towards taxation-related matters as well those not specifically pertaining to just this topic but rather more widely construed within its purview; extending from questions specific to VAT compliance, PAYE filings and record-keeping to how you can go about maximizing your profits.
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