February, 2016

52 Ways To Save Tax #20

Pound coinsIf you are a small business with a turnover of more than £82,000 in a 12 month period (in 2016) then you will have to register for Value Added Tax (VAT).

Once you have registered for VAT, you will then have to charge the right amount of VAT, pay any VAT due to HMRC, submit VAT returns and keep VAT records.

Considering that the standard rate of VAT in the UK is 20 per cent, your VAT bill can become quite substantial. But, there are ways to mitigate the amount of VAT that you pay. Keep reading to learn more.

52 Ways to Save Tax – Part 20 : Change your VAT scheme

In simple terms, businesses pay VAT on the sales that they make and reclaim the VAT on any purchases. However, while many company owners assume this is the only way to deal with VAT, there are a number of schemes which may be more suitable for you. They may also help you to save money.

Consider a Flat Rate Scheme

If your estimated VAT taxable turnover in the next year will be £150,000 or less then you can join the ‘flat rate scheme’ for VAT.

Under the flat rate scheme you keep the difference between what you charge your customers and pay to HMRC but you don’t reclaim any of the VAT that you pay on purchases. There is also a one per cent reduction in the flat rate percentages for your first year of VAT registration.

The VAT flat rate you use depends on your business type. Some examples of the flat rate charged to various sectors include:

  • Lawyer/legal services                 5 per cent
  • Pubs                                           6.5 per cent
  • Boarding/care of animals           12 per cent
  • Computer/IT consultancy           5 per cent
  • Hotel or accommodation            5 per cent
  • Retailing food or tobacco           4 per cent

Flat Rate is easy to use and can save you money if you have a lower than average level of VAT purchases.

Use the Annual Accounting Scheme

You can use the Annual Accounting Scheme if your estimated VAT taxable turnover for the coming year is not more than £1.35 million.

When you use the VAT Annual Accounting Scheme you make either nine monthly or three quarterly interim payments throughout the year. You then only need to complete one return at the end of each year and you pay any outstanding VAT due at that time. If you have overpaid, you will receive a refund.

Using this scheme is easier and less time consuming than other methods, helping you to save time and money.

Use a Margin Scheme

Most businesses charge VAT on sales and reclaim VAT on purchases.

However, if you sell second-hand goods, works of art, antiques or collectibles, there may have been no VAT for you to reclaim when you bought them. In this case, it may benefit you to use a ‘margin scheme’.

Margin schemes let you account for VAT only on the difference between the amount you paid for an item and the sale price (the ‘margin’). You won’t pay any VAT if you don’t make a profit on a sale.

Under this type of scheme you can still use standard VAT accounting for other sales and purchases.