If you’re considering starting your own Limited Company, there are quite a few things to think about. We can help with all of this. We can provide you with software to look after everything, which is in partnership with FreeAgent, incorporate your company and introduce you to some of our partners to help with items such as insurance protection and online business banking.
We find that VAT is often left to just utilising the standard VAT scheme of quarterly submissions calculating VAT charged and reclaimable VAT. However, there are a few other options that could be more beneficial for you and your new Limited Company.
Annual Accounting VAT Scheme
With this scheme, like the Cash Accounting, you will need to have a turnover of £1.35M or less. You can continue to use Annual Accounting, if already using, until your estimated VAT taxable turnover exceeds £1.6M.
With the Annual Accounting Scheme, you pay VAT ‘on account’ in nine monthly or three quarterly instalments. These instalments are based on the VAT you paid in the previous year. If you have been trading for less than a year, the instalments are based on an estimate of your VAT liability. You only need to complete one VAT return at the end of the year. If you have not paid enough VAT on account you must make a balancing payment. If you have overpaid, you claim a refund from HMRC. Annual Accounting can reduce your paperwork because you only need to complete one annual VAT return instead of four quarterly VAT returns. It can also make it easier to manage your cash flow. However, you still have to keep all required VAT records and accounts. Annual Accounting is not suitable for businesses that regularly reclaim VAT, as you would only get one repayment at the end of the year. A disadvantage of Annual Accounting is that if your turnover decreases, your interim payments may be higher than under the standard VAT accounting.
Dependant on your circumstances, there may be some disadvantages to using cash accounting:
- You cannot reclaim VAT on your purchases until you have paid your suppliers. This can be a disadvantage if you buy most of your goods and services on credit.
- If you regularly reclaim more VAT than you pay, you will usually receive your repayment later under cash accounting than under standard VAT accounting, unless you pay for everything at the time of purchase.
- If you start using cash accounting when you start trading, you will not be able to reclaim VAT on most start up expenditure, such as initial stock, tools or machinery, until you have actually paid for those items.
- If you leave the Cash Accounting Scheme you will have to account for all outstanding VAT due, including any bad debts.
https://www.gov.uk/vat-annual-accounting-scheme
Cash Accounting
To be able to utilise this option you will need to have a turnover of £1.35M or less. You can continue to use Cash Accounting, if already using, until your estimated VAT taxable turnover exceeds £1.6M.
Cash Accounting can help with your businesses cash flow as you only pay the VAT element on your invoices, when you receive payment from your clients. This can be of benefit if you have regular slow payers. The submission is based on payments rather than invoices raised. You will need to keep detailed reporting on payments made for goods and services and invoice payments received. Cash Accounting VAT submissions cannot be used in conjunction with Flat Rate VAT.
There may be some disadvantages to using cash accounting:
- You cannot reclaim VAT on your purchases until you have paid your suppliers. This can be a disadvantage if you buy most of your goods and services on credit.
- If you regularly reclaim more VAT than you pay, you will usually receive your repayment later under cash accounting than under standard VAT accounting, unless you pay for everything at the time of purchase.
- If you start using cash accounting when you start trading, you will not be able to reclaim VAT on most start up expenditure, such as initial stock, tools or machinery, until you have actually paid for those items.
- If you leave the Cash Accounting Scheme you will have to account for all outstanding VAT due, including any bad debts.
https://www.gov.uk/government/publications/vat-notice-731-cash-accounting
Flat Rate VAT
With Flat Rate VAT, you pay a fixed percentage depending on the rate determined by HMRC. You will need to have a VAT exclusive turnover of £150,000 or less. From 1st April 2017 there is a check of which rate you pay. For example a limited cost business will use the 16.5% flat rate. You can take a simple online test to determine if you are a limited cost business. (https://www.tax.service.gov.uk/check-your-vat-flat-rate/vat-return-period).
A limited cost business is defined by HMRC as one whose VAT inclusive expenditure on goods is either less than 2% of their VAT inclusive turnover in a prescribed accounting period, greater than 2% of the VAT inclusive turnover but less than £1000 per annum. If the prescribed accounting period is one year and if not one year then the figure is a relevant proportion of the £1000.
You will charge VAT at 20% on invoices (you do not charge or reclaim VAT on business that are exempt) and pay VAT to HMRC at either the 16.5% or whatever rate is determined by HMRC (https://www.gov.uk/vat-flat-rate-scheme/how-much-you-pay). You do not reclaim VAT on purchases.
With this scheme, you don’t need to keep an eye on payments made and payments received. You still need to show a VAT amount on each sales invoice, but you don’t need to record how much VAT you charge on every sale in your accounts. Nor do you need to record the VAT you pay on every purchase.
If you register for the Flat Rate Scheme in your first year of VAT registration, you can take advantage of a 1% reduction in your flat rate percentage.
There are other advantages too:
- Fewer rules to follow as you no longer have to work out what VAT on purchases you can and cannot reclaim.
- There are less chance of mistakes, you have fewer worries about getting your VAT right.
- You always know what percentage of your takings you will have to pay to HM Revenue & Customs, the flat rate percentages take into account zero-rated and exempt sales. They also contain an allowance for the VAT you spend on your purchases.
Flat Rate VAT might not be right for you or your business if:
- You buy mostly standard-rated items, as you cannot generally reclaim any VAT on your purchases.
- You regularly receive a VAT repayment under standard VAT accounting.
- You make an amount of zero-rated or exempt sales.
If you need any help or advice, please contact one of our experienced team members on 01252 863700 or email info@epayme.co.uk