Did you know that all businesses must register for VAT if their total taxable turnover for the last 12 months was over £85,000 or if they expect the turnover to exceed £85,000 in the next 30 days? This applies to sole traders, limited partnerships, limited companies, and other business structures. You can also voluntarily register your business for VAT.
Whether you are legally required to register for VAT or register voluntarily, it’s crucial to choose the right VAT scheme for your business and ensure you’re clued up with Making Tax Digital (MTD) for VAT. To help you get started, Kale Accountancy has put together a quick guide to VAT schemes and complying with MTD for VAT.
Do I need to be VAT registered?
The best way to ensure you know if and when you need to register for VAT is to check your accounts regularly. VAT is calculated on a rolling basis, so you need to monitor your taxable turnover for a rolling 12-month period. If your total taxable turnover over the last 12 months exceeds £85,000 at any point, your business will need to register for VAT.
Make sure you register within 30 days of the end of the month in which you exceed the VAT threshold. If you don’t register for VAT in time, you will still be liable for the tax you owe from the date your registration should have occurred. HMRC may also add on interest and penalties, so it’s best to register on time.
Once your business is VAT registered, you’ll need to charge VAT on all eligible sales, keep valid VAT receipts for all expenses you’re claiming VAT on and file and pay your VAT Returns via Making Tax Digital on time. Any late submissions or payments may incur penalty charges – and no one likes those!
Even if you aren’t likely to reach the £85,000 VAT threshold anytime soon, you may voluntarily register for VAT. Some small businesses do this to appear larger and more established, which can be appealing to customers, suppliers, lenders, and investors. It also means they can benefit from reclaiming VAT on goods and services. If you’re considering registering for VAT voluntarily, we suggest chatting with an experienced accountant to ensure it’s a good move for your business.
Choosing the right VAT Scheme for your business
When registering for VAT, you will likely have the choice of which VAT scheme you would like to use. Getting this right for your business is essential, as it’ll determine how you calculate your VAT Returns and how often you need to file them via MTD to HMRC. Choosing a suitable VAT scheme for your business can also give you better control over your cash flow.
Cash Accounting
The Cash Accounting VAT scheme requires you to calculate your VAT when clients/customers pay your invoices rather than when you raise them. This can be particularly advantageous for small and medium-sized businesses with restricted cash flow, as you will only pay VAT to HMRC once your client has paid their invoice. It also offers relief from bad debts. If a client is late paying or hasn’t paid you, you won’t be obligated to include the amount in your VAT calculation until the money is in your account.
A few other things to remember – with Cash Accounting, you will only reclaim VAT on your business’s eligible purchases once you have paid your suppliers’ invoices. This accounting scheme is only available if your taxable turnover is less than £1.35 million. You must file a VAT return quarterly via MTD-compliant or bridging software.
Accrual Accounting
Accrual Accounting is a VAT scheme that requires you to calculate VAT based on when an invoice was issued or raised. It requires your business to have sufficient cash reserves to cover VAT payments to HMRC on unpaid invoices, hence why small businesses often choose Cash Accounting instead.
If your business has a higher turnover exceeding £1.35 million, you must choose Accrual Accounting as your VAT scheme.
Flat Rate VAT Schemes
A Flat Rate VAT scheme is where you pay a fixed percentage on any VAT-inclusive turnover. If HMRC accepts your business for this scheme, the percentage you pay will be based on your industry and agreed in writing. Keep in mind that your business’s turnover must be £150,000 or less per year to be eligible for Flat Rate VAT, and you will need to fill in the VAT600 FRS form.
Flat Rate VAT can help small businesses save on VAT, as rates are lower than the standard 20% VAT Rate. However, you won’t usually be able to reclaim VAT on purchases as part of this scheme – only capital assets over £2,000, including VAT.
If it’s your first year of being VAT registered, you will receive a 1% discount on your flat rate.
Making Tax Digital for VAT
Are you registering for VAT for the first time? You’ll automatically enrol for Making Tax Digital for VAT.
Making Tax Digital (MTD) for VAT was introduced in April 2019 for VAT-registered businesses with a turnover above the threshold of £85,000. Then, in April 2022, all VAT-registered businesses, including those voluntarily registered for VAT, were required to comply.
MTD for VAT requires you to use compatible accounting software or bridging software to keep and maintain VAT accounting records, create VAT returns, and send your VAT returns to HMRC. You can no longer submit VAT returns via the HMRC website. They must (by law) be submitted via MTD unless you are exempt.
It is doubtful that your business will be exempt from MTD for VAT. However, suppose you can’t use a computer, software, or the internet due to age, disability, living in a remote location or on religious grounds. In that case, you or your accountant can ask HMRC for a digital exemption.
Why was MTD for VAT introduced?
MTD for VAT is not something to fear – in fact, it’ll make your life as a business owner a whole lot easier! You will save significant time and effort by using compatible record-keeping software and tools, which automatically calculate, prepare, and send your VAT Returns to HMRC. What’s more, MTD ensures greater accuracy of VAT returns by removing the manual process and can, therefore, prevent your business from making costly mistakes.
MTD for VAT Accounting Software
If you’re not already using cloud-based accounting software, it’s time to switch! A crucial part of MTD for VAT is that your business uses compatible accounting software to calculate, prepare and send VAT Returns. A complete list of MTD-compatible accounting software is available on the HMRC website, but feel free to contact Kale Accountancy for our recommendations too.
Are you currently using spreadsheets to record your accounting data? While we strongly advise switching to cloud-based accounting software, HMRC does allow you to use MTD-compatible bridging software to create digital links that transfer your VAT return information to HMRC. Again, you can find a complete list of compatible bridging software on the HMRC website. However, migrating to MTD accounting software will likely prove more efficient and beneficial to your business in the long run.
VAT Accounting Services in South London
Do you need help registering your business for VAT and professional advice on choosing the right VAT scheme? Would you like the peace of mind of leaving your VAT returns in the capable hands of our expert accountants? Kale Accountancy offers fully outsourced MTD for VAT accounting services to meet your needs and ensure your business remains compliant. Please book a free 30-minute consultation at your convenience to find out more.
