VAT can be a confusing concept and many businesses fail to grasp it completely. Unfortunately, failure to understand and follow VAT rules can leave companies vulnerable to penalties. Small businesses in particular can face considerable losses for failing to stick to the rules, and, of course, this can be incredibly damaging.
Put simply, businesses with a turnover of £83,000 from VAT-able supplies must register for VAT and have to account for VAT whenever a supply of goods and services takes place. If registration is applied for too late it can result in penalties.
Businesses can opt to register on a voluntary basis before reaching the turnover threshold. While this may seem an odd choice, as it means that VAT will be due on sales from the date of registration, it can be a good move. HM Revenue & Customs (HMRC) will allow VAT to be recovered on set-up costs relating to the intended VAT-able activities of the business so start-up businesses can end up recovering 20% of their costs as VAT before making any sales. This can be a real cash flow advantage.
The standard VAT rate is 20% and this is the rate that is most likely to apply for most businesses, but some items are specifically exempt, zero-rated or charged at the reduced rate of 5% VAT. It is always worth checking that you intend to charge VAT at the correct rate before starting to supply your customers.
If your business sells VAT-taxable goods or services to customers, the tax that is charged on those is referred to as "output tax". In general, most businesses factor VAT into the final price of purchase and pass the cost on to the customer. It is always worth checking before signing contracts with customers to ensure that VAT can be added on to the contract price agreed for goods/services and not deducted from it, which would result in a loss of income as part of the contract price will be lost as VAT due to HMRC.
The VAT paid to suppliers for goods and services that your business buys in is called "input tax". This covers the cost of things like raw materials, business equipment, business phone calls, those goods you plan to re-sell and payments for professional services - all extremely important factors for start-ups to consider. Businesses can claim back input VAT from HMRC on VATable supplies and business overheads.
Once VAT is registered, a business will pay HMRC the difference between the output tax on goods and services it has supplied less the input tax on purchases. This is usually done via quarterly VAT returns but it is possible to apply for annual or monthly VAT returns.
There are strict deadlines for payment of VAT returns; delays or non-submission can result in penalties called default surcharges. These range from an initial warning letter to penalties of 2%, 5%, 10% or 15% of the VAT due for each subsequent late return.
If sales of VAT-rated goods or services exceed the current VAT turnover threshold of £83,000 in a rolling 12-month period, your business should register for VAT. To do this, you must notify HMRC within 30 days of the end of the month in which the turnover for the last 12 months exceeded the VAT registration threshold.
In some circumstances, other rules apply. For example it is necessary to register immediately when a business has purchased the trade and assets of another business where that business purchased had a turnover above the VAT registration threshold for the 12 months prior to acquisition, so it is always worth taking advice to make sure that the correct registration date is applied for.
It is possible to apply in writing but it is usually easier and quicker to complete the relevant VAT application forms online. It is essential that you notify HMRC within the registration deadlines, as failure to do so could prove expensive. HMRC can (and will) apply penalties for late registration that can be up to 100% of the VAT due.
The level of penalty for late registration is dependent on a number of factors such as the length of the delay in registering for VAT, whether the failure to register for VAT is deliberate and/or concealed from HMRC and whether or not the omission is disclosed to HMRC by the taxpayer. Plus, you will still have to pay HMRC the original VAT that you should have been charging customers.
The prospect of registering for VAT may seem like just another thing on a long list of jobs that start-ups need to carry out, but pushing this to the bottom of your priority list could be a costly mistake. To avoid penalties, treat this important issue as a priority and always seek professional VAT advice.
Copyright © 2016 Tamara Habberley, senior VAT consultant, The VAT People.
Running a small business can be stressful. Business owners often have to do everything, from sweeping the floors to cashing the cheques. But one thing that most owners really dread is the end of year tax return.
To help small firms everywhere, we've asked 11 SMEs what advice they would give to other firms when preparing for the end of the tax year. Here's what they said:
"Consistent work throughout the year prevents major tax season disasters; the more work you can put in throughout the year, the better off you’ll be. Taxes are about monotonous legwork. Even if it’s fifteen or twenty minutes a week, the fact that you are carefully sorting out your papers or highlighting specific expenses that will require attention will be of benefit."
"When I first registered with my accountant, they spent a day training me on Sage so that I didn’t make any mistakes inputting receipts or preparing invoicing. Then prior to sending off my VAT return each quarter they do a quick analysis to make sure everything is correct.
I have also set up an email address called [email protected] And every invoice and receipt I get, I automatically forward to this address. I then log in on a Sunday evening and spend an hour inputting all this information; It means I don’t get distracted during the normal working day and input something incorrectly or forget to add it. My accounts are up-to-date and there's less work for the accountant and a lower bill at the end of each year."
"We use Xero for most of our transactional needs, including VAT returns. I have to say we’re very impressed – it really is a one-stop-shop. Whether you’re an app user or not, the key to ensuring a slick tax return submission is consistently ensuring your books are up-to-date and getting everything handed into your accountant in plenty of time."
"First off, you need to plan for year-end. You need to review your profit (or loss) for the year to date and then you need to estimate income and expenses for the remainder of the year. Once you have this information, you need to see where you can be 'tax wise' and consider what you can do to reduce your tax liability. I would review all purchases over £500 so you can determine whether they are an expense or need to be capitalised."
"Be proactive and your year-end will be a breeze. The first thing to do is to ensure that you are using the latest cloud accounting technology (such as Xero, Sage One or Quickbooks) to keep your books up-to-date. Next, contact your accountant well in advance and ask him or her to dive into your accounts to check everything is OK and ready for the end of the year."
"Greenpal is best described as Uber for lawn care. My previous company was a landscaping firm that grew to 150 employees over 15 years. But over the course of that journey I made a critical mistake - I was cheap with my tax advice and the selection of accountancy firm I worked with.
After I sold the company to a national organisation they pointed out years of mistakes that my novice accountant was making because my company simply outgrew him. My advice to fellow business owners and entrepreneurs is not to be cheap with selecting an accountant to work with.
Rushing at the last minute to get all of your tax preparations in order is like cramming for an exam the night before; sound tax preparation happens all year long."
"Hire a professional to prepare your tax returns for the first year or two, or until you are comfortable preparing them on your own. This is the number one mistake that gets businesses in trouble; by the time they find out a problem exists, it is too late.
Invest in professional tax software such as Quickbooks. These programs make it easy to keep records and allow you to see your income patterns, fluctuation of expenses and cash flow. If you cannot see the big picture of your business activity then it is impossible to cut costs, identify 'untapped markets' or improve your business plan."
"I was never any good at keeping on top of business finances – which usually involved all receipts and invoices being thrown into a folder and then trying to add all of this into a spreadsheet once or twice a year in a mega rush. Now I use Xero, a cloud book-keeping and accounts management system; it has simplified my business financial records and has made life much easier.
Xero allows us to have constant access to real-time results and it links to my business accounts so that transactions are automatically pulled through and matched. Paper records are a thing of the past – I take photos of receipts and link them to the transaction and I can instantly forget about them.
Xero gives my accountants instant access to everything they need and ensures a smooth end of tax year when they come to complete my year-end accounts, self-assessment tax return and all company returns."
"The preparation for year-end taxes should be on-going. Typically, companies wait to do everything just before deadline because they’re preoccupied in running their businesses. This creates more work for the accountant. Only having up to date information once a year is not the proper way to be running a company and it can be incredibly risky."
"I used to leave everything to the last minute and endure late nights but now I prepare well in advance. As I move through the business year I keep track of receipts - stapling them to a piece of A4 and writing an explanation alongside is helpful. And with tools such as Excel and OpenOffice the whole job has become even easier. As well as paper copies, I have everything entered electronically too. This gives me a really good idea of the headline figures in advance so I can ensure everything is ready in terms of funds.
Taking a few minutes out every hour or so to clear the mind in meditation is highly beneficial and helps to minimise the risk of making errors. I am careful about what I eat and drink anyway but at tax time I stay well away from sugar to help me to stay focused. Now as well as doing my taxes much faster I also do them more calmly."
"We prepare for the tax year by using Quickbooks. It allows my accountant to log sales, returns and itemised deductions into one simple place. It places all of this information into the schedules so at the end of the year, all I have to do is pull up the schedule information, fill in the information on my tax form and it’s done."
Copyright © 2016 Alexander & Co
With all the political grandstanding and scaremongering over the EU referendum, it was easy to forget that the Chancellor, George Osborne, had a Budget to deliver this week.
It was his fourth Budget statement in 12 months and, with businesses still reeling from the previous three, business support organisations were calling for some calm. The British Chambers of Commerce urged “a steady approach that gives businesses, individuals, and Government itself the time needed to work through existing commitments and reforms".
This was echoed by Mike Cherry, policy director of the Federation of Small Businesses: “In the face of a number of emerging global and domestic pressures, small businesses are looking to the Chancellor to back them through what are set to be challenging times ahead.”
However, this was always going to be easier said than done. The Office for Budget Responsibility is expected to reduce its Budget surplus forecast for 2019-20, with weaker growth and lower tax revenues. If the Chancellor is to stick to his Budget deficit plans, he needs to find money from somewhere.
So what plans did the Chancellor lay out to keep his economic plan on track?
The CBI Director-General, Carolyn Fairbairn, said: “After a year of surprises, this was a stable Budget for business facing global stormy waters. The Chancellor has listened to our concerns about the mounting burden on firms and chosen to back business to grow the economy out of the deficit.
“Businesses will welcome the Chancellor’s permanent reforms to business rates – taking more small firms out of the regime and changing the uprating mechanism from RPI to CPI, which the CBI has long been calling for."
[Updated 16.35, 16 March 2016]
The Chancellor of the Exchequer, George Osborne, announced the 2016 Budget on Wednesday 16 March.
Also see our Budget 2016 summary for small businesses and reaction from small firms and their representatives:
In 2012 the law was changed to oblige all employers to offer a workplace pension scheme to their "qualifying" employees, onto which they would be automatically enrolled.
Businesses with 30 or more employees have now signed up to workplace pensions. The next stage is for businesses with fewer than 30 employees – these firms have an automatic enrolment date from 1 January 2016 to 1 April 2017. The staging date (being the date an employer must begin automatic enrolment) is based on the number of people employed by way of PAYE.
The legislation requires employers to make a minimum contribution of 1% of a worker's qualifying earnings, rising to 2% from October 2017 and to 3% from October 2018.
The employee also has to make contributions of 0.8% of their qualifying earnings, rising to 2.4% from October 2017 and to 4% from October 2018.
Qualifying earnings are currently classed as gross earnings (before income tax and national insurance contributions are deducted) between £5,824 and £42,385 per year. So if an employee earns £30,000 per year the contributions only have to be made on £24,176 (i.e. £30,000 minus £5,824). The qualifying earning levels will be reviewed on a yearly basis.
Employees are divided into three categories - entitled, eligible and non-eligible. These categories are used to ascertain if they are "qualifying" employees. The definition of each of these groups is as follows:
Eligible. These are workers who are automatically enrolled into a pension scheme and for whom the employer has to pay minimum pension contributions. They are workers who fit the following criteria:
Non-eligible. These workers can be enrolled into the pension scheme should they wish to be, and the employer will have to pay pension contributions. They are workers who fit the following criteria:
Entitled. These workers can be enrolled into the pension scheme should they wish to be, but in this instance the employer does not have to pay pension contributions. They are workers who are aged between 16 and 74 earning less than £5,824 per year.
An employee can choose to opt out from the scheme and should do so within one month of being auto-enrolled. Provided the opt-out is made within one month then contributions made by the employee and employer will be refunded by the pension scheme.
If you are unsure of your status, or how your business needs to proceed, it's best to seek professional advice. These changes are enshrined in law and businesses not meeting their obligations, or missing their staging date may face a fine.
Copyright © 2016 Carol Cheesman, principal of Cheesmans Accountants based in Islington, North London.
With 2016 well underway, now is a good time to check in on those business-related new year’s resolutions you made in January. Have you stuck to them?
One key area that all business leaders should be committed to this year - and beyond - is getting their VAT in order. The consequences of poor VAT planning range from an administrative headache to serious financial implications that could close down a company. So what can be done to minimise the risk?
Business leaders often have a good understanding of VAT but if they aren’t handling it day-to-day, then they must ensure that other members of the team understand their responsibilities as well.
In some businesses this lies with the financial director and their team; in others it will be administrative staff that are processing orders. It is not uncommon for different individuals within the same firm to have varying levels of VAT knowledge and to be taking different approaches - introducing standards across the board can help improve consistency and make VAT compliance more simple.
VAT is full of variables and exceptions to the rule, so an awareness of these is vital. This is especially true in sectors such as education and charities, where processing staff may enter purchases as standard rate for VAT and fully recoverable from HMRC without realising that VAT recovery for the cost may be restricted or not possible, potentially costing money.
There are also many exceptions when it comes to entertainment and other business expenses and this is an area that is commonly checked by VAT inspectors. Taking time to understand the ins and outs of VAT recovery and the VAT treatment of supplies will pay dividends in the future.
It is all too common for VAT to become a focal point at the end of a VAT quarter. This can cause multiple issues. Firstly, the due date for the VAT return may have passed which can cause the firm to become liable for default surcharge penalties.
Secondly, if there are unusual/one-off transactions, leaving it until the last minute to seek advice can cause an administrative nightmare as well as unnecessary stress on your staff. Thirdly, you could have cashflow problems if the VAT due is much higher than expected.
These issues can be rectified by keeping a constant check on VAT throughout the year, so that when the VAT return is due for submission it can be quickly and effectively compiled. Any VAT deadlines should be strictly observed, with simple reminders set up on the company calendar.
One effective approach is to assume the role of an HMRC inspector and carry out an audit of your business. To begin with, audit the basics and check whether teams are accounting for VAT on all expenses and income correctly. Complete an audit trail to follow the company processes from start to finish in order to flag up any gaps.
Take a look at the figures to ensure they flow correctly and look for inconsistencies. Also, do sense checks to prevent costly transposition and other processing errors. Do this regularly and you'll avoid nasty surprises when it comes to an official inspection.
By adopting these measures throughout the year, business owners and managers can regain control over VAT planning, preventing it from becoming a burden. As with many business lessons, the key lies in strong organisation and effective processes that are well communicated to everyone within the company and reviewed on a regular basis.
Sponsored post: copyright © 2016 Tamara Habberley, senior VAT consultant, The VAT People.