What you need to know about VAT

Although the ins and outs may be tricky to grasp for first-timers, the sooner you get your head around the HMRC VAT system, the sooner you can benefit from it.

There are three rates of VAT which are applied to goods and services:

1.  Standard Rate (currently 20%)
2.  Reduced Rate (currently 5%)
3. Zero Rated (0%, obviously)

Items may also be exempt (or ‘outside the scope’) of VAT.

What is the difference between 0% VAT and VAT exempt?

0% VAT rate means you can still reclaim costs in your HMRC VAT return, whereas with a VAT-exempt item you cannot.

Standard VAT rate – vs - flat VAT rate schemes

If and when you register for VAT you have two choices of schemes.

Standard rate VAT

The first, the Standard Rate VAT, involves manually reclaiming VAT on every eligible item you buy or sell.

Flat rate VAT

The second, Flat Rate VAT, is open to businesses with a turnover of less than £150,000; this scheme was introduced to simplify the VAT process for freelancers, contractors and small businesses.

On the Flat Rate VAT scheme you will simply apply an HMRC-mandated rate to your turnover based on your sector. Common Flat Rate rates for one-person businesses include:

Current Sector Rate

• IT Consultancy 14.5%
• Photography 11%
• Journalism 12.5%
• Accountancy 14.5%
• Computer Repair 12.5%
• Other B2B services 12%
• Any other service 12%

To make the Flat Rate scheme even more appealing, HMRC allow new registrants to apply a 1% discount to their rate for their first year of registration.

Who can register for VAT?

VAT registration is open to anyone; whether this is a sole trader or a limited company. You can voluntarily register whenever you like, however there comes a point when legally you must register.

When should I register for VAT?

Registration is mandatory if your turnover for the past year has exceeded the VAT registration threshold (see the current thresholds a www.gov.uk/vat-registration-thresholds). It’s important to note this is calculated on a rolling basis, so we’re talking about your turnover in the twelve months directly preceding the current month.

If you know your turnover will reach the threshold soon, allow enough time to register beforehand. If you fail to notify HMRC in time, you may be liable for a penalty!

There are some situations in which it may be beneficial to register voluntarily before you hit the threshold.

What are the benefits of voluntary VAT registration?

• You can reclaim the VAT on your expenses (Standard Rate scheme only)
• There are potential savings to be made by being VAT registered (Flat Rate scheme only)
• If your clients are large companies who are themselves VAT registered, registering could be advantageous. They will be used to seeing prices inclusive of VAT, and will be able to reclaim the VAT
• It may make you more credible in the eyes of your clients, in the same way that having a limited company makes you appear more ‘professional’

Why might I not want to register for VAT voluntarily?

If your clients are smaller companies and are usually not VAT registered, the addition of VAT may make you more expensive than some of your competitors. Registering for VAT requires you add 20% to your invoices, so if your client isn’t VAT Registered, they cannot reclaim this.

It is imperative you keep ahead of the cash flow implications when you are registered for VAT to ensure this doesn’t impact on your business.

How do I report VAT?

For VAT Registered business, a tax return is required - usually every quarter - to tell HMRC how much VAT you have paid and received. All VAT Returns are filed online, Depending on your expenditure you may have to make a VAT payment to HMRC, or be owed a VAT refund.

At Omni we will help with your VAT, registration or your claims – we can also provide you with an initial, free of charge consultation to work out what will work best for you!

Request a free of charge call-back from our website or contact us by clicking here.