Next Steps: VAT Registration

Congratulations on becoming VAT-registered! This guide will help you navigate the additional responsibilities that come with VAT registration. We will cover updating your accounting system, pricing considerations, VAT invoicing, and VAT return submission. Additionally, we will provide information on various VAT schemes that may be applicable to your business.

Basics of VAT

Value-Added Tax (VAT) is a tax payable on sales of goods or services. There are five different VAT rates: Standard Rated (20%), Reduced Rated (5%), Zero Rated (0%), Exempt, and Out of Scope VAT. Understanding these rates is crucial when calculating and charging VAT on your products or services.

Updating Your Accounting System

To update your accounting system for VAT registration, follow these steps:

• Xero: Update your VAT status in the accounting menu by selecting Advanced, then Financial settings. Choose your VAT scheme and period, and enter your VAT number. Edit each account’s default tax setting to reflect the correct VAT treatment.
• Quickbooks: Access the Taxes section and select Set up VAT. Choose the start month for VAT calculation, filing frequency, and accounting method. Enter your VAT registration number and specify if you’re using the Flat Rate Scheme. Confirm your selections.
• FreeAgent: Go to Settings, select VAT Registration, and choose “Registered” or “Registration Applied For.” Enter the necessary details, including the expected registration date.
• Spreadsheet: Insert two columns by the gross value, one for VAT and one for the net figure, to include VAT in your bookkeeping records.

Different VAT Schemes

VAT schemes offer different ways to calculate and manage VAT. Here are some common VAT schemes:

• Margin Schemes: Margin schemes allow you to calculate VAT based on the value you add to certain goods when selling them. This applies to second-hand goods, works of art, antiques, and collectors’ items. Margin schemes can reduce the VAT payable if you couldn’t reclaim VAT when purchasing these goods.
• Annual Accounting Scheme: The VAT Annual Accounting Scheme is suitable for businesses with an annual VAT taxable turnover of £1.35 million or less. It allows you to complete only one VAT return each year instead of the usual four, reducing administrative burden. Additionally, you make regular VAT payments throughout the year, avoiding a large bill at year-end.
• Cash Accounting Scheme: The VAT Cash Accounting Scheme is available for businesses with an annual VAT taxable turnover of £1.35 million or less. Under this scheme, you pay VAT to HMRC when your customers pay you, rather than when you issue invoices. You can only reclaim VAT on purchases after paying your suppliers.
• Flat Rate Scheme: The VAT Flat Rate Scheme simplifies VAT calculations for small businesses with an annual taxable turnover of £150,000 or less (excluding VAT). Instead of recording VAT on every sale and purchase, you apply a fixed-rate percentage to your gross turnover. You cannot reclaim VAT on purchases, except for certain capital assets over £2,000.
• Retail Schemes: Retail schemes are applicable to businesses selling a significant amount of low-value or small-quantity items to the public. These schemes allow you to calculate VAT once with each VAT return, instead of calculating it for each individual sale. Retail schemes cannot be used in conjunction with the Flat Rate Scheme or a margin scheme.

Increasing Prices

VAT registration has a direct impact on how you price your products or services. As a VAT-registered business, you are required to charge VAT on applicable sales. When determining your pricing strategy, consider the following:

1. VAT-Inclusive Pricing: Decide whether you will display prices inclusive or exclusive of VAT. If you choose to display prices inclusive of VAT, ensure that the VAT rate is clearly stated so that customers understand the breakdown of the total price.
2. Pricing Adjustments: Calculate the VAT amount and adjust your prices accordingly. For example, if the VAT rate is 20% and your original price is £100, the VAT-inclusive price would be £120 (£100 + 20% VAT).
3. Communication: Clearly communicate to your customers that your prices now include VAT. This can be done through signage, website updates, or other forms of customer communication.

Charging and Issuing VAT Invoices

When making sales to VAT-registered customers, you are required to issue VAT invoices. Here are some important points to remember:

1. Mandatory Information: VAT invoices must include specific details, such as your business name, address, VAT registration number, a unique invoice number, the date of supply, a description of the goods or services, the quantity, the VAT rate applied, and the total amount payable including VAT.
2. Retaining Invoices: Keep a copy of all issued VAT invoices for at least six years. These records are essential for your VAT return calculations and may be requested by tax authorities for audit purposes.
3. Simplified Invoices: For retail sales or transactions below £250 (including VAT), you can issue simplified VAT invoices that include fewer details. However, you must still include your business name, address, VAT registration number, the total amount payable, and the VAT amount.

Submitting VAT Returns and Payments

As a VAT-registered business, you are required to submit periodic VAT returns and make corresponding VAT payments. Here’s what you need to know:

1. VAT Return Frequency: Determine your VAT return frequency (usually quarterly) based on HMRC guidelines and your business turnover. Ensure you meet the deadlines for submitting VAT returns.
2. Accurate Records: Maintain accurate records of your sales, purchases, and VAT collected and paid. This information will be used to complete your VAT return accurately.
3. VAT Payment: Pay any VAT due to HMRC by the deadline specified in your VAT return. Ensure you have sufficient funds available to meet your VAT obligations.

For additional information and resources related to VAT, please refer to the following links:

1. VAT Rates: Visit https://www.gov.uk/vat-rates to access information about different VAT rates and their application.
2. Charge, Reclaim, Record VAT: Explore https://www.gov.uk/charge-reclaim-record-vat for detailed guidance on how to charge VAT, reclaim VAT on business expenses, and maintain accurate VAT records.
3. VAT Schemes: Learn about various VAT schemes and their eligibility criteria at https://www.gov.uk/how-vat-works/vat-schemes. This resource provides information on margin schemes, annual accounting scheme, cash accounting scheme, flat rate scheme, and retail schemes.
4. Submitting VAT Return: Access guidance on how to submit your VAT return to HMRC at https://www.gov.uk/submit-vat-return. This resource covers the process, deadlines, and requirements for filing VAT returns.
5. Penalty Points and Late Submission Penalties: Familiarize yourself with the penalty point system and penalties for late submission of VAT returns by visiting https://www.gov.uk/guidance/penalty-points-and-penalties-if-you-submit-your-vat-return-late.

Remember, it’s crucial to seek professional advice or consult HMRC guidelines specific to your business to ensure compliance with VAT regulations.

Disclaimer: This fact sheet is provided for informational purposes only and should not be considered as professional or legal advice. It is based on the knowledge available at the time of writing (June 2023) and may not reflect the most current VAT regulations. Always consult with a professional for personal guidance.