All too often a great web site is spoilt because the final details have not been attended to. If you incorrectly charge (or worse don’t charge) VAT it will cause you a major headache when you get around to doing your accounts.

 

Tax can be a slightly confusing issue, especially if you are setting up a new business venture. Government agencies can be surprisingly helpful so feel free to contact them with any questions – they want you to succeed online too! This section will guide you through the basics of what is relevant to your business:

• Who is in charge of UK Tax Law?
• What is VAT?
• Registering For VAT
• VAT and the Small Business
• Further Information

Who is in Charge of UK Tax Law?
HM Revenue and Customs are the government department who have the responsibility for collecting taxes and custom duties. As a business you will come into contact with HM Revenue and Customs on issues involving VAT. You can visit the government’s website to find answers to almost all your questions: http://www.hmrc.gov.uk.

 

What is VAT?
VAT (Value Added Tax) is the tax that is charged on most business transactions that are made in the UK. VAT is also charged on goods and some services entering the UK from other EU countries. It can also apply to goods that are imported from countries outside the EU as well. VAT is charged on ‘taxable supplies’. Examples of ‘taxable supplies’ are:

• Selling new and used goods, including hire purchase
• Renting and hiring out goods
• Using business stock for private purposes
• Providing a service, for example hairdressing or decorating
• Charging admission to enter buildings

VAT does not apply to all goods or services. Some are classed as being ‘exempt’. These can include loans of money, some property transactions, insurance and types of education and training. There are three rates of VAT in the UK:

• 17.5% the standard rate;
• 5%  reduced rate for domestic gas and electricity etc.
• 0%   zero rate for children’s clothing, books, medicine, etc.

If you are unsure about which rate your products or services are set at, then contact the National Advice Service on 0845 010 9000 or visit their website.

Registering for VAT
If your business goes over the registration threshold, you become a ‘taxable person’. The current threshold is set at £60,000. You become liable to register for VAT if your taxable turnover goes over the threshold at the end of any month in any one financial year. If you do not register yourself for VAT at this stage, you could be fined.

VAT and the Small Business
If you are a Small Business, there are a number of schemes available that should make dealing with VAT easier.

 

Cash Accounting: means that you only have to account for and pay VAT when your customers pay you. This can help greatly with your cash flow and will give immediate relief from VAT bad debt. You can make use of this scheme if your total turnover, excluding VAT, is not more than £660,000. The full details of the scheme can be found on H.M.C.E Notice 732, VAT: Cash Accounting.

Flat Rate Scheme: allows you to pay VAT as a percentage of your annual turnover rather than having to work out the VAT on all your sales and purchases. For example, if your annual VAT inclusive turnover is £70,000 and your flat rate is 10%, you will owe £7,000 in VAT. However, any invoices that you issue must show the correct rate of VAT for that product or service, not your flat rate.

The rate that is applied to your business depends on the category that your business falls into. There are six main categories:

• Selling Goods
• Leisure, travel or cultural services
• Construction, repairing or renting goods
• Agriculture, manufacturing or primary industry
• Professional or business services
• Other Services

Contained within these categories are fifty-five business types, each with their own rate. A leaflet detailing each of these rates can be downloaded from the Revenues and Customs website.

To apply to join the Flat Rate Scheme, you have to expect in the next twelve months that your taxable turnover, not including VAT, will be no more than £150,000 and that your total turnover, not including VAT, will not exceed £187,500. This includes any non-business income. Although this will not be used when working out how much VAT you will have to pay while on the scheme.

The full requirements for the Flat Rate Scheme can be found on H.M.R.C. Notice 733, VAT: Flat Rate Scheme for Small Businesses.

Annual Accounting: On this scheme you will only fill in one VAT return per year, rather than having to complete a VAT return every three months, which is the norm. With this you estimate your VAT for the year and pay instalments for the coming year. Any amount that is outstanding must be paid when the return is due (two months after the end of your annual accounting year).

To use this scheme, your total turnover excluding VAT should be less than £150,000. But you may also make use of this scheme if your turnover is more than £150,000 but less than £660,000 and you have been VAT registered for twelve months. The full requirements for Annual Accounting can be found on H.M.R.C. Notice 732, VAT: Annual Accounting.

Get More Information
If you want to speak to Customs and Excise directly then they can be contacted through their National Advice Service on 0845 010 9000 – this is available from 8.00am to 8.00pm, Monday to Friday. All H.M.R.C. Notices can be accessed from there website at www.hmrc.gov.uk