VAT is a tax charged on most business transactions in the UK. The current rate of VAT is 20%.
VAT-registered businesses must add VAT to the cost charged when they provide goods and services to customers. You must register for VAT if your Company’s annual turnover for the previous 12 months either exceeds a specific limit called the VAT threshold (£85,000: 6 April 2019 to 5 April 2020) or you think your turnover will go over this limit. If you consider your turnover will exceed the VAT threshold we recommend that you register for VAT as soon as possible.
VAT is added to the value of your fees. By way of example an invoice to one of your clients in the sum of £5,000 would be £6,000 (£5,000 x 20% = £1,000).
Flat Rate Scheme (FRS)
The Flat Rate Scheme (FRS) is a scheme designed to help small businesses reduce the amount of time they have to spend accounting for VAT. If you use the FRS you do not have to calculate VAT on every transaction as you pay a flat rate percentage of your turnover as VAT. This benefits you as it is simpler and easier record keeping and gives you certainty and peace of mind as to what your VAT liability will be.
A Company may only register for the FRS if it is VAT registered and its expected turnover in the next year excluding VAT is less than £150,000.
Under the FRS the Company pays HMRC a fixed percentage of gross turnover which varies according to industry sector (e.g. 10.5% for Financial Services) but still charges 20% on goods and services. The difference between VAT collected and the amount payable to HMRC is treated as income of the Company.
However, under the FRS you cannot always reclaim VAT on your purchases. So if you purchase a substantial number of goods and services from VAT-registered businesses or you make a lot of zero-rated or exempt sales you may pay more VAT.
As part of our service we offer VAT registration to all new clients. We will also advise you whether or not you should join the FRS.
As a director of your Company you have several VAT responsibilities, including:
- Completion of a VAT Return every quarter and
- paying any VAT due at the same time as submitting the VAT Return in which case you will have at least four weeks after the Return period to make the payment.