Understanding VAT with Sage One
You’re probably already familiar with the concept of VAT and paying it on everyday goods and services like petrol, white goods and that cappuccino in your favourite cafe. But as a business owner it’s important to understand when you need to register and which scheme will be best for you.
Read our guide to the common terms you’ll meet, and find out how Sage One can smooth the whole process by keeping you up to date with HMRC.
What is VAT?
Value-added tax (VAT) is a charge added onto the sale of goods and services by most businesses in the UK, and paid to HMRC.
What is the current rate of VAT?
There are several different rates of VAT:
• The standard rate is currently 20%, which went up from 17.5% in January 2011
• The reduced rate is 5% and applies to some goods and services such as children’s car seats and home energy
• The zero rate applies to most food, children’s clothes and stamps
See the full list of rates of VAT on different goods and services.
When do businesses have to pay VAT?
The threshold for paying VAT is set each year in the Budget. The current level is £82,000. So if your UK turnover of taxable goods and services over the last year is higher than this figure, you must register to pay VAT.
To start the process, go to the VAT registration pages on GOV.UK.
When don’t you have to pay VAT?
If your turnover is below £82,000 a year, you don’t have to register for VAT.
However, many businesses do it voluntarily. There are several benefits to doing this:
• If you have a high-growth business, you’ll be confident that your business is VAT compliant before you go over the threshold.
• Being registered for VAT makes you look more professional, presenting you as an established, successful business. Customers have more confidence in you and clients may choose you over the competition because they trust you to deliver.
• Getting money back from the tax man. Yes, it does happen! Being registered to pay VAT means you can also claim it back and get a VAT refund. This is useful if your suppliers are VAT registered or you’re paying it on stock and equipment. You can even backdate your VAT claim, to four years.
Which VAT scheme is right for your business?
There are several different options available to you, depending on the nature of your business. You’ll be issued with a VAT return that must be paid no later than thirty days after the end of the quarter, otherwise you might face a penalty from HMRC.
Cash accounting: This looks at what payments you have made and received, rather than the invoices sent and received. This can be useful if you have clients who are less than prompt with their payments, or try to avoid paying you at all.
• Taxable turnover must be £1.35 million or less
• Appeals to small businesses and sole traders whose accounts aren’t complex
Annual accounting: This looks at the previous year’s total VAT liability. If you’re a new business you can take an estimate of future turnover. There is a cashflow advantage if your business is very seasonal or is growing fast – but equally, it might make things difficult if your turnover fluctuates from year to year.
• Taxable turnover must be £1.35 million or less
• Submit one VAT return per year.
• Quarterly payments. You can also opt to pay monthly, starting month 4 through to 12 with a final balancing payment in month 14.
Flat-rate VAT scheme
This was introduced to help smaller business reduce the admin load of collecting VAT. You pay a fixed rate to HMRC, and keep the difference between what you charge your customers and what you pay to HMRC.
Your flat rate depends on the nature of your business, so be careful to get this right. A restaurant will pay HMRC 12.5% , but for pubs the rate is 6.5%.
• Taxable turnover to be £150,000 or less
• Rates vary according to your business. See the full list of VAT flat rates
What if you trade in the EU or overseas?
If you import, acquire or buy goods or services from abroad you may have to pay VAT under the reverse charge mechanism. This means you don’t have to become VAT registered in lots of different countries.
For more detailed information on this, visit GOV.UK’s guide: How does the reverse charge work?
You can also find out more about the different VAT schemes for small businesses in this article by accountant Mark Barrett, in the Legislation section of our website.
Make VAT easier with Sage One
Using online accounting systems to manage your finances can make the whole process of submitting your VAT return much easier – and give you peace of mind that you won’t miss the deadlines.
To prepare your VAT return with Sage One it’s a simple four-step process:
1. As you enter your transactions, Sage One automatically calculates the VAT you owe. Don’t worry if you use multiple currencies, it will ensure you comply with international VAT laws by using the correct rate.
2. When VAT is due, simply select the date range and run the return.
3. You can then save, print or submit the VAT return online. This means you can submit your figures direct to HMRC, no need to enter the information manually.
4. You can opt to connect to your bank so the money is transferred automatically to HMRC – so no fines for accidentally missing a payment.