
It's important to
stay on top of your VAT Accounting if you want to protect your business, pay
the correct amount of tax and remain compliant.
VAT is a tax
that's charged at 5% or 80% on goods and services not essential. Like any
tax, reality is much more complex.
This article will
explain some common mistakes that business owners make when it comes to VAT
accounting, and how they can be avoided.
What Is VAT?
When a product
gains value, VAT is collected. You must collect VAT for HMRC whenever you
rent or sell goods or services. Some exceptions apply, like sales outside
of the UK. But for most businesses, VAT is applied to all sales if they are VAT
registered.
You can claim the
VAT charged to you by your suppliers for business expenses as long as you are
VAT registered.
What are the most
common mistakes that you should avoid?
Use the
wrong VAT accounting scheme
Four methods are available for the
processing of VAT accounts.
Standard VAT accounting method. You will submit your VAT returns digitally each quarter
by using making tax digital-compliant software.
* Annual accounting VAT scheme. It is similar to standard accounting, but you only submit
one VAT return per year and pay quarterly according to what you
anticipate owing. This method can improve cash flow by making payments more
predictable. However, it could lead to overpayments. If your annual taxable income is more than £1.35million, you are not eligible.
* Flat rate scheme. You pay a percentage of your total turnover in VAT under
this scheme. You can find the VAT rates for each industry on the
government website. This scheme is only available if you have a turnover below £150,000.
Cash accounting scheme. Cash accounting scheme. You record VAT on the day you
receive payment, not when you sent the invoice. This is ideal for small
businesses with slow payers, or those who don't purchase large quantities on
credit. You're also not eligible if you
have a turnover above £1.35million.
If you are unsure, it can be
difficult to decide which method is best for your business.
Failing to register for VAT in 30 days
It's
easy for you to overlook the fact that you have exceeded the
threshold. It's especially hard because the threshold is applied on a
rolling scale: You must register for VAT when your turnover exceeds £85,000 in
the past 12 months and not just during a specific financial year. Register
if your expected turnover will exceed the threshold within the next 30 day.
Be sure
to track your income and seek advice when you hit the threshold for
registration. You'll be able to avoid penalties if you track your monthly
income.
If it
suits your business, you can register voluntarily for VAT.
Reclaiming VAT without a valid bill
You
cannot claim if you do not have a valid invoice for VAT. If HMRC checks
your records, you will be penalized if you try to do this.
It must
be a VAT invoice and the supplier must have VAT registration. The invoice
must also contain the company's name, not the director's. Otherwise, it will
not be valid for VAT.
Not
applying the correct rules when claiming VAT on motoring costs
Motoring costs, especially
car-related ones, have different rules regarding VAT claims. You must pay special
attention to these rules.
For example, there is
a specific definition for what counts as a car for VAT purposes, and you
generally can't recover the VAT charged on purchasing one, unless it's
considered an 'excepted' car by HMRC.
If you lease a 'qualifying car' for
business purposes, you can usually claim 50% of the VAT.
You can usually reclaim all the VAT
on fuel if your car is only used for business purposes. If it's also used for
private purposes, you can either reclaim the VAT and pay a separate road
fuel scale charge, or only reclaim the amount you use on business trips.CPA (With detailed records to back up your claim.)
Forgetting about these rules can
result in costly errors if HMRC carries out an inspection.
Overdue
purchase invoices
You might be able to reclaim
VAT on invoices that haven't been paid, but only if the following
conditions are met:
* 6 months or more have passed since
the date of the supply or the date the payment was due, whichever is later
* VAT has already been paid to HMRC
* You've wiped the debt in your VAT
accounts and transferred it to a separate bad debt account
* The value must not be more than
the normal selling price
* The debt isn't factored in, or a
similar arrangement
Records of the invoice and a
separate bad debt account must be kept for four years after the claim is made.
Tax on Property
VAT accounting on property can be difficult to navigate,
despite how many brilliant articles and guides you can find online. mistakes can cost thousands of pounds.
You'll set yourself up for success by having an expert on your side.It's important to not leave VAT accounting to chance. Contact us at Account Ease to learn more about and how it will impact your business.