HM Revenue & Customs (HMRC) has offered words of reassurance to the 120,000 businesses that failed to meet the August deadline for Making Tax Digital (MTD) for VAT.
The tax authority has confirmed that it will not be issuing fines to those businesses that missed the date.
Under MTD, all businesses with a turnover of £85,000 or more must keep computer-based records and file their VAT return using approved and HMRC-compliant software.
The latest figures suggest that around 1 in 4 firms failed to meet the deadline, meaning that the taxman could have issued tens of millions of pounds in fines, which could be between £100 and £400, depending on the turnover of the business.
While the taxman is showing leniency now though, it has been made clear that late filings will be punishable with fines after the ‘soft landing’ period ends during April 2020, even though recent research has found that the majority of business owners say they feel unprepared for MTD.
With the latest MTD for VAT problems in the spotlight, now is a good time to check out the facts about VAT.
Here’s what your business needs to know about VAT
Whether you’re a seasoned pro or a tax newbie, VAT can cause major headaches for business owners. From VAT schemes and registration to MTD and exempted goods and services, VAT can cause even the most experienced entrepreneur to slip up from time to time.
So, what’s the deal with VAT? In this blog, we’ll answer some of the most common questions we hear from small business owners just like you.
When do you need to register for VAT?
A business must register for VAT when its taxable turnover exceeds £85,000 in any consecutive 12-month period, or if you know it is likely to.
Remember, your taxable turnover is the total of everything sold in the UK or EU that is not VAT-exempt. You would also include any services purchased from EU suppliers under the VAT Reverse Charge scheme.
There are also opportunities to voluntarily register for VAT. We’ve explained why this might be a good idea below.
What are VAT accounting schemes?
There are several VAT accounting schemes available, each designed to simplify the tax regime (see, even HMRC knows it’s complicated!).
The most common schemes are as follows:
- VAT Cash Accounting (taxable turnover of £1.35 million or less) – VAT is paid when income is received, rather than when it is invoiced.
- Flat Rate VAT Accounting (taxable turnover of £150,000 or less) – VAT is calculated as a percentage of turnover. A special rate is set per industry based on the general cost of VAT-rated goods.
- Retail and VAT margin schemes – Simplified VAT schemes specific to the retail and other niche sectors.
How do I register for VAT?
Most businesses can register for VAT online by following this link. Your accountant or agent can also sign up on your behalf.
Some businesses must register by post. Find more on this here.
What are the advantages and disadvantages of registering for VAT?
If your business earns less than the VAT threshold, you may wish to register voluntarily.
Why? A VAT-registered business can give the appearance of a big and established company, even though yours is actually a small outfit. This will have benefits both domestically and internationally. Registering for VAT will also allow you to reclaim the cost of VAT on certain goods.
The primary drawback, however, is the additional accounting and administration burden. Most VAT-registered businesses must submit quarterly tax returns using digital software, which may be outside the realms of their skillset or resources.
Before registering for VAT, it is always best to first seek advice from a professional.
If you are lucky enough to earn more than £85,000, you don’t have the luxury in choosing whether you want to sign up or not. However, you can choose to enrol in a VAT accounting scheme, which may simplify and reduce the burden of reporting VAT. Again, it’s best to seek expert advice before registering for a scheme.
What does MTD mean for my business?
Under the new digital tax regime, almost all VAT-registered businesses earning above the VAT threshold (currently £85,000) need to keep their records digitally and submit their VAT returns using MTD-compatible software.
To your business, this may mean investing in a software package and training staff to use it.
To find compatible software, click here.
How much VAT should I charge on (XYZ)?
There are three different rates of VAT, which explains why things can get so complicated. These are the standard rate, reduced rate and zero rate. The standard rate is charged on most goods and services, while the reduced and zero rate is charged on special goods and services. A full list of reduced or zero-rated goods and services can be found here.
Meanwhile, some goods and services are classified as VAT-exempt, meaning no VAT is charged and they are not counted in your VAT-taxable turnover.
If your business only sells VAT-exempt goods, it is not allowed to register for VAT, even if its turnover is above the £85,000 threshold.