VAT

VAT (Value Added Tax) is a tax added to most products and services sold by VAT-registered businesses. Businesses have to register for VAT if their VAT taxable turnover is more than £90,000. They can also choose to register voluntarily if their turnover is below the threshold.

The VAT you pay is usually the difference between any VAT you’ve paid to other businesses and the VAT you’ve charged your customers.

If you’ve charged more VAT than you’ve paid, you must pay the difference to HMRC.
If you’ve paid more VAT than you’ve charged, HMRC will usually repay you the difference.

Registration thresholds 

• VAT registration threshold: £90,000

• VAT deregistration threshold: £88,000

When a business’s total taxable turnover exceeds £90,000 or when goods are brought into Northern Ireland from the EU, VAT registration is mandatory.

If a business sells goods from Northern Ireland to EU consumers through 'distance selling' and their EU-wide sales exceed £8,818, VAT registration is required in relevant EU countries.

Businesses already registered for VAT with a taxable turnover falling below £88,000 have the option to cancel their VAT registration to simplify administration.

VAT Schemes 

VAT schemes are designed to simplify the way some VAT-registered businesses calculate and account for VAT to HMRC.

VAT Annual Accounting Scheme 

With the Annual Accounting Scheme, you make advance VAT payments towards your VAT bill based on your last return (or estimate if you’re new to VAT), and submit 1 VAT Return per year.

You can join the scheme if your estimated VAT taxable turnover is £1.35 million or less.

Payments:

• Monthly: 10% of estimated VAT

• Quarterly: 25% of estimated VAT

• A final balancing payment is made after the year-end return.

VAT Cash Accounting Scheme 

With the Cash Accounting Scheme:

• You pay VAT when your customers pay you

• You reclaim VAT when you pay your suppliers

Eligibility: VAT taxable turnover must be £1.35 million or less

VAT Flat Rate Scheme 

With the Flat Rate Scheme:

• You pay a fixed rate of VAT to HMRC based on your business type

• You keep the difference between the VAT you charge and the fixed rate paid to HMRC

• You cannot reclaim VAT on purchases (except capital assets over £2,000)

Eligibility: VAT turnover must be £150,000 or less (excluding VAT)

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If you are a retail business or sell second-hand goods, you may be able to use:

• A VAT Margin Scheme

• One of 3 VAT Retail Schemes

VAT margin schemes 

VAT margin schemes tax the difference between what you paid for an item and what you sold it for, not the full sale price. VAT is charged at 16.67% (1/6th) of the margin.

You can use margin schemes for:

• Second-hand goods

• Works of art

• Antiques

• Collectors’ items

VAT Retail Schemes 

Retail schemes simplify VAT calculations by estimating VAT on your sales in bulk rather than per transaction.

There are 3 standard retail schemes:

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1. Point of scale scheme 

Use when VAT rates are clearly known at sale time.

Calculation:

• Add up sales at each VAT rate

• Divide 20% rated sales by 6

• Divide 5% rated sales by 21

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    2.Apportionment Scheme 

Use if you buy goods for resale.

Calculation:

• Total purchases per VAT rate

• Divide total per rate by total purchases

• Multiply outcome by total sales

• Divide 20% sales by 6, and 5% by 21

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   3.Direct Calculation Scheme 

Useful when a minority of sales are at one VAT rate.

Calculation:

• Calculate expected selling prices (ESP) for either minority or majority goods

• Divide standard-rated ESP by 6

• Deduct reduced or zero-rated ESPs to isolate standard rate VAT