What is vat and what schemes are there?
Vat is a taxed that is charged on the sale of goods and services in the UK and in the EU. There are currently vat rates of 20%, 5% ,0% and items that may classed as outside the scope of vat.
The difference in the 0% and outside the scope of vat is how they are reported in the vat return. 0% vat items are included in the vat calculations but they have no vat charged and may include books and newspapers outside the scope of vat are not include in the vat return calculations and include financial services and payments of other taxes.
You will need to be registered for VAT if your sales go over the vat threshold limit currently £85,000. You can of course choose to voluntarily register for vat before you reach that threshold, you may choose to register if that means that you can reclaim the vat on the purchase that you make.
Once you are registered for VAT you will need to make submissions and payments of vat on a monthly, quarterly or annual basis. The payments of vat will be calculated on either the difference on the vat on your sales and the vat on your purchases or a fixed percentage rate if you are on the flat rate vat scheme.
The different VAT Schemes are – Vat Annual Scheme, Vat Cash Accounting Scheme, Vat Flat Rate Vat Scheme, Vat Margin Schemes and Vat Retail Schemes. The latter two are less common so we will not focus on them.
Vat Annual Scheme
You will make advance payments each month towards your vat bill and then submit a single vat return at the end of the year and make a final payment or receive a refund if you have overpaid.
Vat Cash Accounting Scheme
Under this scheme you will only pay vat and reclaim vat based on the invoices that have been paid to you and when you pay your invoices for the goods and services you have used. There is also a variant of this used in the flat rate vat scheme.
Flat Rate Scheme
You will pay the vat based on a percentage determined by the type of business that you do. There was a change made to this in April 2017 which introduced the concept of a limited cost trader. So if you had very small expenses the flat rate vat percentage was increased to 16.5%. The flat rate vat percentage is applied to the gross amount of the invoice including vat. So if the invoice amount is £100 + £20 vat, vat of £120 x 16.5% = £19.80 is paid in vat.
This change seems to have reduced the financial benefit in being in the flat rate scheme although the vat scheme is easier to manage for small business who do not have sophisticated reporting systems.
Once you are registered for VAT you will be sent a vat certificate by HMRC with an effective date on, you must start charging vat on all your invoices from that date until you deregister for VAT.