VAT Registration and Returns – An Overview

When should I register for VAT?

Businesses are required to register for VAT if taxable turnover (the total value of sales that are not exempt from VAT) exceeds the current VAT registration threshold. As of April 2022, the threshold is £85,000.

The business must register for VAT within 30 days of turnover exceeding this threshold. It's important to note that this threshold applies to a rolling 12-month period, not just the current tax year.

However, in some cases the business may choose to voluntarily register for VAT even if its turnover is below the threshold. This could be advantageous if customers are VAT-registered businesses, as they would be able to reclaim the VAT charged.

If you anticipate that turnover will exceed the threshold in the near future, you can also register the business for VAT before reaching that level. This might be relevant if the business makes significant purchases with VAT, as registration would allow the business to reclaim the VAT on those purchases.

It's important to keep track of turnover and regularly review VAT obligations to ensure compliance with HMRC regulations.

What are the different VAT schemes available?

Here are some of the main VAT schemes;  

• Standard VAT Scheme.

  Businesses on the standard scheme must calculate and pay VAT based on the difference between their VAT on sales (output tax) and VAT on purchases (input tax). This is the most common scheme.

• Flat Rate Scheme (FRS).

  Under the Flat Rate Scheme, businesses pay a fixed percentage of their gross turnover to HMRC as VAT. The percentage varies depending on the sector. This scheme simplifies record-keeping but may not be beneficial for all businesses.

• Annual Accounting Scheme.

  With the Annual Accounting Scheme, businesses make advance payments towards their expected VAT liability on account each month or quarter. At the end of the year, they submit one annual return and either make an additional payment or receive a refund based on the actual liability.

• Cash Accounting Scheme.

  This scheme allows businesses to account for VAT on the basis of cash received and paid, rather than invoice dates. It can be beneficial for managing cash flow.

It's important to carefully consider their circumstances and choose the VAT scheme that best suits the needs of the business.

How do I file a VAT return?

There are several steps to filing a VAT return, these are detailed below; 

• Keep Accurate Records.

  Maintain detailed records of all your sales and purchases. Your records should clearly show the amount of VAT you've charged and the VAT you've paid.

• Determine VAT Period.

  Identify your VAT return periods. Most businesses submit quarterly VAT returns, but some may have different schedules based on their chosen VAT scheme.

• Calculate VAT Due.

  Calculate the amount of VAT you owe to HMRC by subtracting the input tax (VAT you've paid on purchases) from the output tax (VAT you've charged on sales). There is a different calculation if you are submitting VAT returns using the flat rate scheme.

• Submit VAT Return.

  Log in to your HMRC online account and navigate to the VAT section. You can use the HMRC's Making Tax Digital (MTD) service to submit your VAT returns electronically. If you use accountancy software such as Xero or Free Agent, you will be able to submit VAT returns to HMRC via the software.

• Pay VAT Due.

  Pay any VAT owed to HMRC by the deadline. Payment is due one calendar month and seven days after the end of the VAT period.

• Keep Copies of VAT Returns.

  Retain copies of your VAT returns and any supporting documentation for at least six years. Using accountancy software can help with this process.

What are the penalties for late filing and payment of VAT?

Late filing and payment of VAT can result in penalties and interest charges.

The amount of penalties and interest can vary depending on the length of the delay and the amount of VAT owed. It's essential to meet VAT deadlines to avoid these financial consequences. Here is an overview of the potential penalties;

• Late Filing Penalties.

  If you submit your VAT return after the deadline, you may face a late filing penalty. The penalty is calculated based on how late the return is and how many times you've been late in the previous 12 months. The penalties can range from an initial fixed amount to daily penalties for continued lateness.

• Late Payment Penalties.

  If you fail to pay the VAT owed by the deadline, you may be subject to late payment penalties. The penalties are generally calculated as a percentage of the outstanding amount and can increase the longer the payment is overdue.

• Default Interest.

  In addition to late payment penalties, HMRC may charge interest on the outstanding VAT. Interest is usually applied from the date the payment was due until the date it is paid in full. The interest rate can vary and is typically set by HMRC.

• Criminal Prosecution.

  In severe cases of deliberate tax evasion or fraud, criminal prosecution is possible. However, criminal charges are typically reserved for the most serious cases.

It's important to note that penalties and interest are designed to encourage compliance with VAT obligations. If you're having difficulty meeting your VAT obligations, it's advisable to contact HMRC as soon as possible to discuss your situation. In some cases, they may be willing to arrange a payment plan or provide assistance.

To stay informed about the latest VAT regulations, regularly check the official HMRC website or consult with an accountant who can provide guidance based on your specific circumstances.