Question

Q) How do the venders submit VAT to the government? Discuss the process

Answer 1

Answer.

Who can register for VAT?

There’s a common misconception that only people operating their own limited companycan register for VAT, when actually VAT registration is open to sole traders as well. You can voluntarily register whenever you like, but there comes a point when legally you must register.

When must I register for VAT

Legally, you must register for VAT when:

• Your VAT-taxable turnover (the total of all sales that aren’t exempt from VAT) exceeds the current threshold of £85,000 within a 12-month period (on a rolling basis)
• You expect your VAT-taxable turnover to exceed the threshold in a single 30-day period
• You only sell goods or services that are exempt from VAT, but you purchase goods to use in your business to the value of more than the threshold from VAT-registered suppliers in the EU.

You need to register for VAT within 30 days of meeting any of these criteria.

If you know your turnover will reach the threshold soon, you should allow enough time to register. If you fail to notify HMRC in time, you may be liable to pay a penalty.

There are some situations in which it may be beneficial to register voluntarily before you reach the threshold. Read our article for more detail on VAT MOSS.

When should I start charging VAT?

When your turnover reaches the VAT threshold in a rolling 12 month period, you must start charging VAT from the first day of the second month after you exceed the threshold.

For example, if on 30th June 2020, your sales for the previous 12 months are £85,000, then your VAT registration date will be 1 August 2020.

When you expect to exceed the threshold in a single 30-day period, you must start charging VAT immediately.

Why is VAT charged on top of recharged expenses?

Recharges are costs that your business incurs when supplying goods and services which you pass on to your customers. If you’re VAT registered, you’ll need to charge VAT on the amount recharged to the client, even if the expenses your business initially incurred and paid for are not subject to VAT.

A good example is a train ticket, which is not subject to VAT rules. If you pay £100 for your ticket, you include that amount as an expense in your company accounts. However, if you pass the cost on to your client and include it on a sales invoice, you need to add VAT. This situation is quite different to your client reimbursing expenses at cost.There’s no requirement for you to charge the client the same amount you paid in expenses. So using the above example, if you decided to charge your client £150, you would need to add VAT to that amount.

If you’re late in registering, HMRC will retrospectively register your business from the date you should have started charging VAT. You’ll need to add VAT to all sales made from this retrospective date, regardless of whether you actually charge your clients VAT, so you could well lose out if you don’t register when you should. HMRC may also issue you with a financial penalty.

If you know your turnover will reach the threshold soon, you should allow enough time to register. If you fail to notify HMRC in time, you may be liable to pay a penalty!

There are some situations in which it may be beneficial to register voluntarily before you reach the threshold.

Why would I consider voluntary VAT registration?

• You can reclaim the VAT on your business expenses (if you are on the Standard Rate scheme)
• You can register for a reduced Flat Rate of VAT to reduce the administration involved in preparing your quarterly VAT return (Flat Rate scheme)
• If your clients are large companies who are themselves VAT registered, registering could be advantageous. Your clients will be used to seeing prices inclusive of VAT, and will be able to reclaim the VAT paid over to your business
• It may make your business more credible in the eyes of your clients, in the same way that having a limited company makes you appear more ‘professional’.

Why might I not want to register voluntarily?

• If your clients are smaller companies and not VAT registered themselves, the addition of VAT may make you seem more expensive. Registering for VAT usually requires you to add 20% to your invoices, and if your client isn’t VAT Registered, they can’t reclaim this

• With VAT registration comes additional responsibility. You’re required to complete and file a VAT return, usually every three months. If a return is late, there will be a penalty from HMRC
• Since 1st April 2019, if you’re above the VAT threshold, you need to comply with Making Tax Digital for Business rules, which means keeping electronic records and submitting digitally using approved software such as Crunch.

• When you’re VAT registered, it can be more difficult to keep track of your cash flowand profit. However, as a Crunch client, we’ll calculate your VAT liabilities automatically, so you’ll always have an up-to-date picture of your accounts.

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How do I register for VAT

Registering for VAT is usually done online – Gov.uk has all the information you need for how to do it, or if you use online accounting software like Crunch, then we’ll take care of all the registration for you as well as all your filing and calculations. Firstly you need to decide whether you should register for Standard Rate VAT or Flat Rate VAT.

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Standard Rate VAT vs Flat Rate VAT schemes

When you register for VAT, you have two choices of schemes. The first, Standard Rate VAT, involves reclaiming VAT on every eligible item you buy or sell. The second, Flat Rate VAT, is open to businesses with an expected turnover of less than £150,000 (in the next 12 months) and was introduced to simplify the VAT system for freelancers, contractors, and small businesses.

On the Flat Rate VAT scheme, you’ll use a predetermined VAT rate based on your industry type and pay this over to HMRC. First, you add the Standard VAT rate of 20% to your sales invoice amount, then you collect the full amount from your client. Next, apply your sector percentage to this (gross) amount, which is then paid over to HMRC via a VAT return. The difference between the two rates is retained by your business (limited company) as income.

There’s a range of VAT rates for specific industry types available below. We’ve also got an article explaining the Limited Cost Trader Test that is used by many “labour-only businesses” such as contractors.

When you register for the Flat Rate scheme for the first time, HMRC allows you to apply a 1% discount in the first year.