Value added tax is tax due to HMRC on sales of not only goods but also on services rendered, which are not exempt from VAT. Any business with an annual turnover in excess of £82,000 must register for VAT. VAT must be reported to, and where applicable paid to, HMRC quarterly.
Your VAT return will reflect goods and services sold and VAT charged at the current rate of 20%, along with all goods and services you have purchased where you have been charged the 20% VAT element.
It may transpire, in any given quarter that you have paid more in VAT than you have charged, in this instance you will be entitled to a refund.
You can chose to register for VAT even if your turnover is less than £82,000 and it may be prudent to do so if you expect your turnover to exceed this figure even if it has not done so in previous years. You may have a significant purchase or investment where being able to reclaim the VAT is advantageous.
It is your responsibility, as a director, to notify HMRC and register for VAT in advance of exceeding the VAT threshold.
There are various rates of VAT that can be applied and some are specific to industry sectors, also certain items of food and clothing are subject to zero VAT.
There are further options for small business owners whose turnover is less than £150,000. One of the options is the flat rate scheme (FLS). The main advantage, other than its simplicity, is the fact that you do not need to record every sale and purchase for VAT reporting purposes. You will pay a predetermined percentage of turnover between 9% and 14%. Again these payments will be due quarterly.
Some businesses experience a shortfall in cash availability. This is generally caused by debtors paying you at a slower rate than you are paying your creditors. In a bid to reduce this effect you can apply to opt for a cash scheme. You will only pay VAT on sales where the purchaser has paid you, however you cannot claim VAT on purchases until you have paid your creditor in full. This option will not apply to business with a turnover in excess of £1.4 million.
An alternative scheme, with a view to reducing reporting, is the annual accounting scheme. You can make arrangement to pay a fixed fee either monthly or quarterly and pay or receive the outstanding balance based on one annual VAT submission.