13.02 – Paying Your Dues

Most businesses encounter two main types of taxes at some point: Value Added Tax (VAT) and business tax. VAT is based on your turnover, while business tax is based on the profit you make. The HMRC website contains the latest tax rates and details to help you complete your tax returns correctly.

Valuing VAT

Every business over a certain size has to collect taxes as well as pay them. VAT is a tax on consumer spending and is a European system, although countries have significant variations in VAT rates, starting thresholds, and the schemes themselves. HMRC provides a comprehensive website with links to various aspects of VAT, from correcting errors to working out your VAT fuel scale charge. For more information, visit HMRC VAT Guidance.

You don’t get rewarded for collecting VAT but can be penalized for mistakes or late returns. Here’s what you need to know:

Registering for VAT

VAT is complex. Generally, all supplies of goods and services are taxable at the standard rate unless they are specifically zero-rated or exempt. You can register voluntarily for VAT at any time on the HM Revenue and Customs website, but you must register if your taxable turnover exceeds £85,000 in any 12-month period. You can deregister if your sales level falls below £83,000.

Including zero-rated sales in your turnover calculation is necessary since they are technically taxable, though at 0%. Exempt items like health and welfare services, finance, and land should be excluded.

Sometimes it pays to register even if you don’t have to—especially if you’re selling mostly zero-rated items—because you can reclaim VAT paid on purchases. Being VAT-registered may also enhance your business’s professional image.

Calculating VAT

To accommodate VAT records, you might need to extend your bookkeeping system. For example, your analyzed cash book needs additional columns for pre-VAT sales, VAT amount, and the total.

Here’s a simple way to calculate VAT:

Divide the gross amount (total including VAT) by 120 if the VAT rate is 20% (adjust for other rates).
Multiply the result by 100 to get the pre-VAT total.
Multiply the result by 20 to get the VAT element.

Completing the VAT return

Using a computer-based bookkeeping system can simplify VAT returns, as the accounting package automatically generates them. You only need to enter the current VAT rate. Here are the nine key figures VAT inspectors look for:

VAT collected on sales (Box 1)
Value due on acquisitions from other EC Member states (Box 2)
Total VAT due (Box 3)
VAT paid on purchases (Box 4)
Net VAT to be paid or reclaimed (Box 5)
Total sales excluding VAT (Box 6)
Total purchases excluding VAT (Box 7)
Total supplies to EC Member states (Box 8)
Total acquisitions from EC Member states (Box 9)

For a business, VAT is a zero-sum game: you don’t make or lose money; the consumer ultimately pays.

Sending in VAT returns

Each quarter or year, you must complete a return showing purchases, VAT paid, sales, and VAT collected. The paid and collected VAT amounts are offset, and the balance is sent to HMRC. If you paid more VAT than collected, you get a refund. Most businesses must submit digitally via the HMRC online portal.

The Flat Rate Scheme (FRS) helps smaller businesses calculate VAT as a percentage of turnover. Eligibility requires a VAT turnover of £150,000 or less. For more information, visit HMRC Flat Rate Scheme.

Choosing Cash or Income Accounting

VAT is typically levied on invoiced sales, which can lead to paying VAT on unpaid invoices. If this is a problem, you can opt to pay VAT on a cash basis. Check your eligibility at HMRC Cash VAT Scheme.

Other Schemes

Special VAT accounting schemes exist for specific trades, like the Margin Scheme for the motor trade. For details, visit HMRC VAT Schemes.

Understanding EU VAT rules post-Brexit

Post-Brexit, the UK trades with EU countries as it does with the rest of the world. However, Northern Ireland follows different rules, partly in and partly out of both the UK and EU systems. Importers and exporters should refer to the following government websites for current VAT regulations:

VAT and Overseas Goods
VAT Imports and Acquisitions
VAT Exports and Supplies
Account for Import VAT
Complete VAT Return

Minimising tax on profit

While staying within the law, you can explore ways to minimize tax liabilities. Here are some areas to consider:

Include All Allowable Business Expenses: Discuss with your accountant and check HMRC’s Guide.
Carry Forward or Backward Losses: Offset future or past profits under certain circumstances.
Rollover Relief: Defer capital gains tax if planning to buy another asset with the proceeds.
Pension Contributions: Reduce taxable profits through pension contributions.
Writing-Down Allowance: Maximize tax benefits by timing capital asset purchases.
Non-Cash Benefits: Consider share option schemes instead of taxable salary.
Dividends vs. Salary: Explore tax-efficient ways to withdraw money from your company.
Employing Family Members: Utilize tax benefits of family businesses.
Pre-Trading Expenses: Include eligible pre-trading expenses as business expenses.

TaxCafe publishes regularly updated business tax advice guides: TaxCafe Business Tax.

For family businesses, Ridgefield Consulting offers a guide on tax rules and benefits: Ridgefield Consulting Family Business Tax Guide.

Optimizing your tax strategy with professional advice can lead to substantial savings and financial efficiency.