How do I calculate VAT? Who is the one who pays for it?
VAT, which is a contraction of Value Added Tax, is a tax on consumption that is usually applied to items as well as services. The first time it was implemented in the UK in 1973, it today is the third most significant tax revenue source to the Treasury, following Income Tax in addition to National Insurance.
While the financial burden of VAT is on the consumers, it’s the suppliers of goods and services who are the ones to contribute this tax back to the state when they add it to the price they are charging.
The tax rate for VAT for the UK is 20%, but some products and services are eligible for a lower rate of 5%, or even the 0% rate (but they must be declared), and some are exempt completely.
Who is required to sign up for VAT?
Put, any UK firm that has a tax-deductible turnover of at least PS85,000 in any one tax year is required to register for and pay VAT. By 2021, the FSB has estimated that 2.7 million businesses within the private sector of the UK have been reported for VAT and nearly 48% of the total population.
If you’ve reached the final month of which the turnover of your business over the past 12 months is higher than the PS85,000 threshold, you’ll have one more month to register for VAT with HMRC. But don’t worry; the procedure is relatively simple for the majority of firms, and we’ll provide more details on how to register in the future.
Businesses from overseas that supply UK customers with UK market
Whether your company has a turnover greater than PS85,000 (or not), there’s an event in which you still have a legal obligation to be registered for VAT. It is mandatory to sign up for VAT if you meet the following criteria: one or more of these conditions apply to you
- We (the entrepreneurs) have a location outside of the UK
- Your company is located outside of the UK
- You provide any goods or services to the UK (or anticipate doing so during the next thirty days)
Businesses with an annual taxable turnover of less than PS85,000 for the year.
Every UK company (except those that exclusively sell products exempt from VAT) can register for VAT regardless of whether their revenue is less than the threshold for PS85,000. But why would you need to register? How do you determine whether this is the right choice for your company?
The benefits of registering VAT voluntarily include:
- Businesses that are reported can claim back VAT on business expenses
- If you’re nearing the threshold for turnover, You can prevent not writing by the deadline.
Cons of registering VAT on your own are:
- If you register for VAT, you have to pay the tax applicable to every transaction made via your web-based retailer business.
- You can apply the VAT amount to your price, making you less cost-effective.
How do you apply for VAT registration?
Companies can make VAT registration on the internet in the majority of situations. But there are certain situations where you’ll have to sign up offline, through posting in particular in the following conditions:
- Inquiring for a VAT registration exemption
- Multiple business units are registered under different VAT numbers
- Joining the Agricultural Flat Rate Scheme.
Additionally, you can register your business on your own or hire the services of an accountant who will write for your company on your behalf.
To apply for VAT registration through HMRC, you will require these items:
- Contact details for your business (address and telephone number)
- Your business bank account details
- Unique Tax Reference (UTR) number
- Information on your turnover and how you run your company
- You will need your Government Gateway ID and password
How long will it take to sign up?
It is straightforward, but HMRC could take up to one month to complete your registration and mail you a Tax certificate (though they strive to achieve 70% of registrations within ten business days).
Once you have received an invoice for VAT, this will serve as evidence to prove your status as a VAT holder. It will comprise:
- You must include your VAT number (which you have to include on every invoice)
- The details of the first tax return you file
- The date you are VAT registeredas effective registration (when you registered, not the date you received your VAT certificate)
You can access the VAT certification online through the HMRC account, which is accessible via the Government Gateway login.
What is the most efficient accounting system for businesses to calculate VAT?
There are four different types of accounting methods that your company could employ to satisfy your VAT obligations.
The standard VAT Account
The traditional VAT accounting method most businesses use. It is the reason you must record the VAT you pay for each sale, as well as the VAT you pay for every purchase. You file a VAT return with HMRC each quarter.
Annual VAT account
Certain businesses can file a VAT return only each year. However, it is essential to pay quarterly. Every quarterly payment is an estimate or is based on your previous return.
A flat-rate plan Certain small-scale businesses skip accounting entirely and pay a portion of their revenue in VAT
A professional accountant will be capable of advising you whether you qualify to do this and if or not it is an appropriate choice for your company.
The system of cash accounting
If you decide to make use of cash-based accounting, then you’re presumed to have paid or collected VAT whenever money moves into the hands of another and not at the time when the invoice is paid.
What is the matter with Making Tax Digital?
The UK is currently in a phase of transition to a fully digital tax structure (known by the name of the Making Tax Digital or MTD). All VAT-registered companies are required to maintain digital records of every transaction and file VAT returns with software.
You can utilize an official service to search for tax-digital-compliant software to help with VAT.
What happens if you fail to apply for VAT?
As VAT registration is legally required for every company with a turnover more significant than PS85,000, there’s a penalty system that is in place for any business or sole trader who is above the threshold and who fails to register. The amount is determined by an amount of VAT that the company is liable to HMRC and is increased in time.
Cancellation of VAT registration
If you’re no longer eligible to be registered for VAT, you must inform HMRC in 30 days or else risk the possibility of a fine. It is usually when your company ceases to trade or if you stop selling VAT-taxable sales. Contact us at Account Ease. Here we have a team of professional accountants which streamline your financial management.