Value-added tax (VAT) is a type of indirect tax levied on goods and services for value added at every point of production or distribution cycle, starting from raw materials and going all the way to the final retail purchase. The amount of VAT the user pays is based on the cost of the product minus any costs of materials in the product that have already been taxed at a previous stage
Rate of VAT in the UK
You must pay Value Added Tax on every purchase of products or services, whether you are a person or a company. In the United Kingdom three types of VAT rates are charged as follows:
Standard rate: Most goods and services.
Reduced Rate: Some goods and services for e.g., children’s car seats and residential energy
Zero Rate: Zero rates are charged on goods and services like food and children’s clothes
VAT Schemes
Scheme 1 – Standard VAT Accounting
• Standard VAT is 20% which means that you claim VAT on purchases made
• VAT returns are submitted quarterly
• This is completed online and must show output and input tax for that quarter
• You can reclaim VAT for invoices raised in that quarter
Scheme 2 – Flat Rate VAT Scheme
• Provided as an incentive to simplify taxes allowing you to charge VAT on invoices at 20% but only pay HMRC at a lower rate
• For example, IT Contractors have a FLAT rate of 13.5% in their 1st year of trading and 14.5% after this
• This ensures that extra income is raised by contractors
• Certain thresholds exist and your accountant will aid you with staying within these boundaries
Scheme 3 – Cash Accounting Scheme
• If your turnover is more than £1.35 million you CANNOT use this scheme
• This scheme is advantages for businesses that pay VAT only when clients have paid for goods/services
• However, VAT cannot be claimed for goods bought for the company if they have not yet been paid for
• This is completed online and must show output and input tax for that quarter
• Remember that VAT cannot be paid for purchases/services that have not been paid for
Challenges
VAT is not a conventional tax. It is quite complex in nature because it varies from product to product and service to service from 0% to 20%.
VAT calculations are time consuming exercise and require detailed knowledge of various applicable rates and schemes according to your business and eventually pay the right amount of VAT to HMRC.
Additionally, with the passing of the “Making Tax Digital” Act (MTD) in 2019, VAT returns are now required to be calculated and submitted digitally and a company will not be able to submit its returns by completing them on HMRC online services. VAT returns must be submitted using MTD functional compatible software.
Why DAX?
DAX is one stop shop for all your accounting needs
DAX accountants spend time working to ensure your company pays the right amount of VAT to HMRC, as well as to ensure that all VAT registration procedures have been met for the best VAT scheme for your business. They will need access to your business records to ensure that the proper VAT taxes are being collected at the required rate for reporting to HMRC.
Our accountants can also offer crucial advice throughout the tax year and help answer all your questions to reduce time and frustration when working with the complex procedures associated with VAT. This kind of help from a VAT team is necessary due to the sheer number of goods and services that correspond to VAT.
Our team of highly qualified experts do year-round VAT reporting and prepare returns on your behalf. We will submit it online using MTD compliant software. Our accounting software, tax experts and a dedicated client manager is exactly what you need to stay compliant with HMRC’s Making Tax Digital regulations.