Top VAT considerationsfor your business
THE supposed “simple tax” VAT impacts on many businesses, both big and small, across the country and there are many considerations that should be made in relation to it.
In this article, I will set out five of the key areas and issues that arise on a weekly basis for our clients at Armstrong Watson with a further five to follow in my next submission.
1) Should my business be VAT registered?
This may sound like one of the simplest questions surrounding VAT, however it is an area that still causes a degree of confusion for businesses. The current registration threshold is £85,000 and this should be reviewed on a rolling 12-month basis, not just based on the turnover figure included in your annual accounts.
It is also important to consider what should be included when monitoring the £85,000 threshold. For example, all taxable income, including zero rated income, is included, but income deemed to be exempt or outside the scope of VAT is excluded.
If you purchase services from outside the UK, then this may be accounted for under the reverse charge rules, with the value of these transactions also counting towards your VAT turnover, despite actually being an expense to your business.
2) If I do register for VAT, would the flat rate scheme be beneficial for my business?
The flat rate scheme is intended to act as a simplification for small businesses. Instead of calculating output VAT payable on income and the input VAT recoverable on expenditure, a flat rate of VAT payable is calculated on the total turnover achieved.
This can be especially beneficial for businesses which do not incur a high amount of expenditure with input VAT charged on it.
HMRC has restricted the benefits of the flat rate scheme, particularly for service based businesses, with the introduction of the limited cost trader rules on 1st April, 2017. Any businesses currently using the flat rate scheme should review their position to check that it is still beneficial to them.
Entry to the flat rate scheme is available for businesses with an expected annual turnover of less than £150,000. Once in the scheme, you will be required to leave the scheme only when annual gross turnover exceeds £230,000.
3) Could cash accounting be beneficial to my business?
Cash accounting is available for any business with an expected annual turnover below £1.35 million. Under cash accounting rules, you pay output VAT to HMRC only once you have received payment from your customers, therefore mitigating any cash flow disadvantage created by slow payers.
Correspondingly, you can only recover input VAT once payment has been made to your suppliers, so cash accounting isn’t suitable for everyone, but is certainly worth some consideration if cash flow problems are being experienced.
When using the cash accounting scheme it is important to review your turnover on a quarterly basis as once this exceeds £1.6 million for a 12-month period, you will need to revert to invoice-based accounting, with potential cash flow issues arising from this change.
4) Is my business partially exempt?
Partial exemption is an area that can strike fear into businesses (and in some cases VAT advisers, too). It is a complicated area of the VAT legislation and if your business does make a mixture of taxable and exempt supplies then it is vital to have your input VAT recovery reviewed on a regular basis.
Some of the more common exempt supplies we see in our clients’ businesses are in relation to services involving property, education, health and welfare, finance and insurance.
Partial exemption is also a key issue affecting the charities we represent, with an added complication here being non-business income, such as grants that also need to be taken into consideration when determining how much input VAT can be recovered.
5) Do I need to consider VAT in relation to my property?
The answer to this question will always be yes. In every property transaction, be it buying, selling, leasing, constructing, converting, extending or demolishing, VAT should be considered.
The considerations vary between residential and commercial properties. There are too many different areas to discuss here but there are always considerations that need to be made.
It is vital that VAT is reviewed early on in any potential property transaction, so that any potential planning can be put in place, or any nasty surprises can be avoided.