In the UK, Value Added Tax (VAT) is a significant consideration for businesses. While it's essential to operate within the confines of the law, there are legitimate strategies that businesses can employ to minimise their VAT liabilities, or at the very least, delay VAT payments.
At Auditox Accountancy, we are accountancy and tax specialists, and we have many professionals who specialise in VAT services. No matter the size of your business, or your VAT requirements, we can offer tailored advice for all manner of VAT-registered businesses.
If you would like to discuss your options, please contact us, but for now, here are steps to avoid paying VAT, minimising the VAT you pay, or delaying when you pay VAT.
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The VAT registration threshold is essentially a turnover limit set by HMRC. As of 2021, this limit stands at £85,000. This figure represents the total taxable turnover - not profit - that a business can generate over a rolling 12-month period before it must register for VAT.
No VAT Charges On Sales: If your business isn't VAT registered, you won't add VAT to your sales. This can make your pricing more attractive to certain customers, especially those who aren't able to reclaim VAT, like private individuals.
No Reclaiming VAT On Purchases: On the flip side, not being VAT registered means you can't reclaim VAT on your business expenses. This can be a disadvantage if you have significant expenses that include VAT.
Simplified Accounting: Without the need to account for VAT, your bookkeeping can be more straightforward. You won't need to file VAT returns or keep detailed records related to VAT.
If your business's turnover is nearing the £85,000 mark, you might be considering ways to remain below this threshold, at least for the time being.
Defer Sales: One approach is to defer some sales to the next accounting period. For instance, if you're on the cusp of the threshold in December, you might delay invoicing until January. This can be especially useful if you expect the next year's turnover to be lower.
Review Pricing: If you're marginally below the threshold, a slight adjustment in pricing, combined with a careful analysis of sales volume, might help manage your turnover.
Monitor Regularly: Keep a close eye on your rolling turnover. By regularly monitoring, you can make informed decisions about sales, pricing, and invoicing, ensuring you don't inadvertently cross the threshold.
Consult With An Accountant: If you're unsure about your position or the best strategy for your business, it's always a good idea to consult with an accountant. They can provide tailored advice and help you navigate the complexities of VAT.
Some specialists advise splitting your business into smaller businesses to sit below the threshold, but this isn't straightforward. you must have legitimate reasons to run two separate businesses, and HMRC often views this as tax avoidance. Doing so will attract VAT inspectors, causing greater problems than standard VAT registration could.
While the VAT Registration Threshold might seem like just another number, its implications are vast. By understanding the threshold and the strategies surrounding it, VAT-registered businesses can make informed decisions that best suit their operational needs and financial goals.
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The Flat Rate VAT Scheme is a simplified accounting scheme designed by HMRC to aid small businesses in managing their UK VAT. Tailored specifically for businesses with a limited turnover, this scheme offers a streamlined approach to accounting for a VAT-registered business.
To be eligible for the Flat Rate VAT Scheme, a business's VAT taxable turnover must be £150,000 or less. It's essential to note that this figure refers to the expected turnover for the next year, not the past year. If during the year, your turnover exceeds £230,000 (including VAT), you'll need to exit the scheme.
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Fixed Rate Payment: Instead of calculating the VAT on each transaction, businesses pay a fixed percentage of their turnover as VAT to HMRC. This percentage varies based on the type of business.
Keeping The Difference: The beauty of this scheme lies in its simplicity. You charge your customers the standard VAT rate (20% as of 2021), but you only pay HMRC a fixed, often lower, percentage. The difference is kept by the business.
Limited Reclaims: Under the Flat Rate scheme, businesses generally can't reclaim VAT on purchases. However, there's an exception for capital assets costing over £2,000 (including VAT). If you buy such an asset, you can reclaim the VAT, provided it's an item on which VAT is chargeable.
The rate you pay to HMRC under the Flat Rate scheme depends on your business type. For instance:
It's crucial to choose the category that best fits your business operations. If HMRC believes you've chosen the wrong category, they might request back payments. Periodically reviewing your business category, especially if your business evolves, is a good practice.
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Simplified Accounting: With a fixed rate, there's no need to keep detailed VAT records for every transaction. This can save time and reduce accounting costs.
Cash Flow Advantage: By keeping the difference between the standard VAT rate and the flat rate, businesses might enjoy a cash flow advantage, especially if their flat rate is significantly lower than the standard rate.
Predictability: The fixed rate offers predictability, making it easier for businesses to budget and plan for their VAT payments.
While the Flat Rate VAT Scheme offers numerous advantages, it's not suitable for every business. If your business incurs a lot of expenses with reclaimable VAT, the traditional VAT accounting method might be more beneficial. It's always advisable to run the numbers and perhaps consult with an accountant before making a decision.
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The VAT Cash Accounting Scheme is a tailored approach by HMRC to aid businesses in managing their VAT payments more in line with their actual cash flow. This scheme is particularly advantageous for businesses that might face delays in receiving payments from customers. Let's delve deeper into its structure and benefits.
Traditionally, businesses pay VAT to HMRC based on invoices issued, regardless of whether the customer has paid the invoice. However, under the VAT Cash Accounting Scheme:
Payment Upon Receipt: VAT is only paid to HMRC when the business receives payment from its customers. This means if an invoice remains unpaid, the VAT on that invoice isn't due yet.
Purchases: Similarly, for your business expenses, you can only reclaim VAT once you've paid your suppliers.
Improved Cash Flow: The primary advantage of this scheme is the positive impact on cash flow. Businesses don't need to pay out VAT from their pockets before receiving payment from customers. This can be especially beneficial for startups or businesses with tight cash flow margins.
Reduced Bad Debt Impact: If a customer never pays an invoice, under this scheme, you won't have the added burden of having already paid the VAT on that invoice to HMRC.
Simplicity: The scheme can simplify accounting for some businesses. Your VAT records will align more closely with your bank statements, making reconciliation more straightforward.
While the VAT Cash Accounting Scheme offers clear benefits, it's essential to consider a few points:
Delayed VAT Reclaims: If you have significant expenses and your suppliers have longer payment terms, you might face delays in reclaiming VAT on those expenses.
Eligibility: Not all businesses are eligible. Your VAT taxable turnover must be within a certain limit to join the scheme. It's essential to check the latest HMRC guidelines or consult with an accountant.
Exiting the Scheme: If your turnover exceeds the scheme's limit or if you decide it's no longer beneficial, you'll need to exit.
This scheme lets you submit one VAT Return annually rather than every quarter. Throughout the year, you'll make advance VAT payments based on your last return or estimated VAT liability. At the end of the year, you either make a balancing payment or receive a refund. This can simplify accounting and help with budgeting.
If you deal in second-hand goods, art, antiques, or collectibles, you might benefit from a VAT Margin Scheme. Instead of paying VAT on the total sales price, you pay it on the difference between what you paid for the item and what you sold it for (the margin). This can significantly reduce your VAT bill if you operate in these sectors.
In specific industries, the buyer rather than the seller accounts for the VAT. This is known as the reverse charge mechanism. It's prevalent in the construction industry and certain services are bought from suppliers outside the UK. By understanding and correctly applying the reverse charge, you can improve cash flow and reduce administrative burdens.
Some goods and services are zero-rated or reduced-rated for VAT. Examples include most food, children's clothing, and some energy-saving materials. If you deal in these goods, you won't charge VAT on your sales. Ensure you're aware of all reliefs available in your sector.
If you offer prompt payment discounts to customers, you can reduce the VAT amount. You only need to account for VAT on the amount you actually receive from your customer.
VAT legislation and rates can change. Regularly review your VAT processes and ensure you're taking advantage of all available reliefs and schemes. Consider consulting with a VAT specialist to ensure you're not overpaying.
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If you sell goods to businesses in other countries, these sales might be zero-rated for VAT. Ensure you have the necessary documentation to prove the goods left the UK.
While VAT is a complex area of taxation, there are several legitimate strategies UK businesses can employ to avoid VAT or minimise their VAT liabilities, even after compulsory VAT registration. Always ensure you're operating within the law and consider seeking advice from a VAT specialist to ensure you're making the most of the reliefs and schemes available to you.
If you're a VAT-registered business, Auditox Accountancy has a full range of services aimed at assisting you in managing your business, VAT returns, VAT registration, and finances. Contact us today for help.