VAT is one of the most complicated concepts that businesses of all sizes need to consider as part of their everyday operations. Unfortunately, locating information related to VAT that explains it in a simple, concise way is hard to come by, which means many firms go about accounting for it incorrectly.
Micro businesses in particular will often experience difficulty relating to VAT because they do not understand how the rules apply to them. A business of this size will very rarely have a dedicated finance role, which means responsibility for this type of task will fall to different members of staff alongside their other daily jobs.
With this in mind, here we will examine the most common mistakes micro businesses make when it comes to VAT.
Have you registered?
Many businesses often fail to realise they are only required to register for VAT once their turnover exceeds £85,000 on a rolling 12-month basis, or if they generate a VATable income of £85,000 in a one-month period. Many assume, incorrectly, that the threshold is based on their turnover per their financial year and wait until after their annual accounts have been prepared to consider if they are liable to register.
This widespread lack of understanding can often leave firms vulnerable to penalties from HMRC that could have easily been avoided by VAT registering at the correct time. Therefore, it is essential that whoever is in charge of the business checks whether their turnover from sales has reached the HMRC limit of £85,000 over a 12-month period, or whether the business is predicted to generate VATable supplies in excess of this in a 30-day period.
Where sales from VATable supplies have reached the £85,000 limit, businesses are required to submit a VAT return to HMRC. Usually VAT returns are quarterly, but it is possible to apply to account for VAT on either a monthly or an annual basis.
Are you reclaiming VAT on the wrong things?
Businesses are not permitted to recover VAT on costs relating to entertainment other than for staff entertainment. They are not allowed to claim VAT on the cost of entertaining non-employees such as prospective or actual clients. Many small businesses spend a great deal on entertaining, such as meals out for prospective clients, however, many are unaware of the strict HMRC regulations outlined in this area.
Any money reclaimed on entertainment expenditure can leave micro businesses seeking to grow their business by entertaining contacts and clients at risk of facing a penalty.
Are your staff in the know?
It is essential for business owners to have a reasonable level of knowledge regarding VAT, however, it is also vital that anyone else responsible for accounting for sales and purchases at the business has the same expertise. A lack of knowhow is another way in which businesses can incur penalties.
Micro businesses need to identify exactly who will be dealing with VAT, making sure they have the required information to ensure the organisation is compliant with regulations and double check that the VAT is correctly being accounted for.
It is recommended for businesses to roll out a standard approach to VAT across the business.
Are you using the wrong rate?
VAT is applicable at the standard rate, reduced rate or zero rate dependant on the nature of the transaction. It is quite common to see businesses, especially in the building sector applying VAT at the incorrect rate. This can result in either under payments or over declarations of VAR, make the supplier less competitive than rivals accounting for VAT correctly. In addition, it is not possible to recover VAT on costs where the VAT rate has been incorrectly applied.
Flat Rate or Not?
It is possible for micro businesses to use the simplified flat rate VAT accounting scheme, which is an alternative way for companies to calculate how much VAT to pay HMRC every three months. This method is designed to take some of the strain out of recording VAT sales and purchases.
However, it is important to note that companies are not permitted to use the flat rate scheme without agreement from HMRC, therefore, those firms wanting to use it should initially apply to the body. It is also essential to ensure that the correct flat rate percentage for the sector that the business is involved in is selected as HMRC will apply penalties if it emerges that the business has not been paying enough VAT due to use of the wrong flat rate percentage.
Small businesses providing consultancy or other services with limited costs are likely to find that the flat rate percentage means that there is little value in using this scheme.
Are you liable to account for VAT in Other EC Countries?
With the rise of the internet many micro business people trade from home and make supplies of goods and services world-wide. This can provide a whole range of complex VAT issues.
Micro businesses selling electronic services to end consumers in other EC member states will have to register in the EC member state where the consumer is based or sign up via HMRC’s online portal to an accounting system called VAT Moss. There is no minimum VAT registration threshold for such supplies.
Businesses selling delivered goods to end consumers in other EC countries, especially ones trading via online platforms may have a requirement to declare VAT on sales to end consumers in other EC countries if they exceed certain thresholds and will have an immediate liability to do so if selling goods warehoused in another EC member state to the end consumer in that or other EC countries. This can be a real mine field and it would be sensible to seek professional advice if involved in making such supplies.
Are you putting things off?
Leaving matters relating to VAT until the last minute can lead to a number of issues for companies. Therefore, it is important that plans are put in place to avoid this.
Micro businesses need to view VAT as a matter of priority, and this starts with checking to see if the turnover from VATable supplies exceed the HMRC limit of £85,000. Once this has been determined, it is important that the organisation views VAT as a key priority all year round, and the company works together with its accountant or VAT advisor to ensure regulations are adhered to.
By Tamara Habberley, senior VAT consultant, The VAT People