subject: Business Start Up Packages - Advice On Completion Of Vat Returns [print this page] One of the things it is essential for businesses to do is understand and implement the VAT rules early on in the development of the company. Unfortunately it falls to the business to collect tax on behalf of HMRC and be responsible for completion of VAT returns so it is crucial to get it right. Make good use of the information available for instance the "Should I be Registered for VAT?" issued by HMRC.
To be liable to become registered for VAT the turnover of the business will exceed the threshold which is usually increased annually by the rate of inflation. We can provide you with these figures. As a rule only the previous twelve months turnover is taken into account, an exception to this is when taxable supplies may exceed the registration limit during the next thirty days.
Registration is compulsory if at the end of any month, the total value of taxable supplies made in the past 12 months are more than the compulsory registration limit (check with us for the latest figure). A VAT form 1 must be completed and sent to HMRC within 30 days. The date of registration is the first day of the second month following the relative month.
It is also compulsory to register when there is a distinct probability that the taxable supplies figure will exceed the registration threshold during the next thirty days. The registration date in this case will be when the limit is known to be exceeded and you may be able to reclaim some input tax incurred before the registration date. However, this is only possible if the taxation date is no more than six months before registration.
Every non-registered business must watch the threshold very closely. If a business should have been registered at an earlier date, HMRC will levy VAT on the business turnover from the date it should have been registered, less any allowable VAT incurred on purchases. Additionally, a penalty might be levied unless the business has a reasonable excuse for its failure to register. Ignorance of VAT rules is not an excuse.
"Voluntary registration" is possible for any company that has not yet reached the threshold. The obvious advantage for doing this is that VAT on purchases can be reclaimed whereas an unregistered business can only obtain relief if the cost of VAT can be deducted when calculating taxable profits. However, non-registration is usually more advantageous as profits may increase depending on the level of VAT on purchases that cannot be reclaimed.
Goods and services from non-registered suppliers may not be attractive to VAT registered customers, because this will normally increase the cost to them. Nonregistration also indicates the size of the business and might reduce credibility.
Once you are registered you must account for output VAT on the value of your taxable business supplies. On the whole most are standard rated at 17.5%. Some may be zero-rated - these are still taxable but at the rate of zero. It is possible to reclaim input tax on items related to these zero-rated outputs. There is also a tax exempt rating and no related input tax can be offset against these items.
All businesses are expected to apply the correct rate of VAT so that the correct amount of tax due to the HMRC is paid over to them. It is also a responsibility to reclaim input tax only on those items it is correct to do so. Penalties can be made if output tax is under declared and interest may be charged if payments are late. Usually the requirement on returns is that they are made on a quarterly basis, at the end of the month following the last month in the quarter. Payment of the balance due must then be made within a month of the end of the quarter, if the method of payment is bank transfer then it can be a week later.
Although HMRC will penalise businesses for late returns or payments, it is possible to arrange with them to make monthly instead of quarterly returns. Although this means more work for the business it may well be worthwhile if a large amount of input tax is reclaimed, most probably where a company manufactures zero-rated items and is reclaiming VAT on its returns. It is also possible to come to an arrangement whereby a business can use an annual VAT accounting system. The VAT is estimated and based on this figure nine equal payments are made by monthly direct debit. On the tenth month the return is sent and the balance paid. This system is available to businesses with a turnover less than 1.35m (with effect from 1 April 2006).
Another method is to account for VAT on a cash accounting basis, this also depends on the turnover figure being less than 1.35m (from 1 April 2007). This system uses an actual cash received and paid basis as opposed to an accrual basis.
There are several special schemes which may be used by retailers to apportion sales that are both standard-rated and zero-rated. Discussion of the schemes themselves is outside the scope of this publication - refer to VAT Notice 727.
Where a business has both standard and exempt supplies, it is essential that these are correctly accounted for and that records show the sales and purchases split accordingly. Input tax can only be reclaimed in relation to taxable outputs. Where this cannot be directly attributed and it relates to a general supply, it is possible to reclaim part of the VAT. Before completion of VAT returns, refer to the leaflet "Partial Exemption"706 obtainable from HMRC.
by: David A Griffiths
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