An introduction to VAT

Value Added Tax applies to individuals who are in business as well as partnerships and companies. You have to register for VAT if your turnover (all fees received by you including all expenses that you are paid) exceeds the threshold. Penalties for late notification are costly so give us a call if you think you are close to that limit or you want to find out more. Not only can you face a fine for sending in a late application but you would have to go back and re-invoice all of the people that you worked for and try and obtain the VAT from them. If they won’t pay or you can’t invoice them, then you must pay it personally!

You can choose to register whatever your turnover and it can be very cost effective if your circumstances are right.

As a general rule, once you register you must add 17½ % to all of your fees (even if you have two or more types of work) which makes you more expensive. But if the person you are working for is themselves VAT registered they won’t care because the VAT that you add on will be claimed back by them the next time they do their VAT return. 

As a reward to you for collecting all of the VAT that you added on to your fees and handing it over to Customs (now merged with The Inland Revenue), you can add up the VAT from the receipts for most of your expenses and keep it. So you can see that it can be worthwhile from an economic point of view.

The downside is that every 3 months you (or your accountant) must complete a VAT Return and submit it and the cheque to a strict deadline. This isn’t as bad as it seems-the book-keeping has to be done at some time and maybe sooner is better than later. It means your accounts can be done as soon as 4 quarters of VAT is complete, so you will know as early as possible just what your tax liability will be and save for it or start the process of getting a refund if payments on account were too high.

There is a new scheme too, called the Flat Rate Scheme, which the government are promoting as a way to help small businesses. It can make it very beneficial to some people to VAT register, especially as you can use a simplified system of book-keeping as well.

So that is VAT, a complicated subject, in a nutshell but if you want or need more information then contact Angie Ayre on 01283 531242