VAT in the United Kingdom was imposed in 1973, replacing the Purchase Tax. Although the rate was at first 10% on almost all business activities, the rate has been moving up and down.
It is the third-largest source of taxation revenue for the government. Due to its specific rates and continuous use, we have generated a VAT calculator for the United Kingdom.
Vat Calculator UK
Rules and Regulations:
Vat in the United Kingdom works on three different levels described here:
How to Register to VAT in the UK
Any business entity whose Vat-taxable turnover is equal to or above £85,000 is eligible to register for VAT, apart from the fact if what the business serves is already in the exempted category. You can apply by filling the form available on their official website. Once you’ve submitted your request, you’ll receive:
- A confirmation letter is authorizing you a Vat-number.
- The detailed schedule explaining when to report or submit VAT.
If you voluntarily register to vat, you can have many advantages that come with VAT. Also, you can claim a VAT refund if you had paid VAT on the purchases before registration.
The role of HMRC in VAT:
While we talk about Vat, Her Majesty’s Revenue and Cost [HMRC] is one of the most important things to know. It is the department that administers all the taxation tasks in the United Kingdom. When VAT was implemented in the UK, it came with the EU’s VAT laws. These laws apply as the VAT Act in UK legislation.
Lately, UK has broken its ties with the European Union on 31 January 2020. However, the EU VAT regime will remain applicable until 31 December 2002. That means there would be no changes in the already prevailing set of rules for registration, e-filling, and VAT collection.
HMRC sometimes creates schemes and policies to provoke businesses and individuals to pay VAT sincerely. These policies to encourage tax payment eventually boost the revenues. There are some popular VAT schemes. Break down of one of them is given below:
VAT Flat Rate Scheme – Break Down of the Whole Scheme.
A scheme intended to relieve small businesses by letting them pay a fixed amount of tax every year regardless of their turnover changes. Vat Flat Rate Scheme allows the businesses to earn a considerable profit, thereby maintaining a difference between paid VAT and collected VAT from clients.
Vat Flat Rate Scheme described briefly:
To be precise, this scheme works in small businesses’ favor. If you’re using this scheme, you are to pay a certain VAT percentage regardless of your turnover that particular year. You can charge VAT to your clients, as usual, collect the amount, and pay a flat rate of the whole sum. Thus, benefit your business with a more substantial profit ratio. Every industry is entitled to a specific rate. That means you do not need to hire someone for book-keeping of your day-to-day VAT accounts. The peace of mind, less accounting complexities, and secure payment invoice are the underrated advantages come with the scheme.
For example, the UK’s HM Revenue & Commission department gives a 1% discount to businesses in the first year of VAT-registration.
But on the other side, you are not allowed to reclaim VAT spent on purchases. (Excluding some specific situations) Going on with the same example, here are some significant aspects to illustrate how the scheme works.
Eligibility for Businesses to use the Flat Rate Scheme:
Since the scheme is specially generated to empower small-scale businesses, the requirements specifically include:
- Companies must be registered as a VAT vendor.
- Business taxable turnover should be expected to be equal to or less than £150,000.
Businesses exempted from the Flat Rate Scheme:
There are specific reasons that might make your business an exception from the scheme. They include:
- If you have joined any other VAT scheme before, for example, the VAT Cash Accounting Scheme.
- If you have committed any VAT offense in the past 12 months.
- If you had left the scheme within 12 months in the past.
- If your two businesses are closely associated; financial and administrative chores.
However, if you want to leave the scheme deliberately, you can quit at any point.
Limited-Cost Businesses and Vat-Flat-Rate-Scheme:
Limited–cost business termed as a business that does not costs more than 2% of its yearly revenue, regardless of the sector. That means not spending more than 2% of your total income on your merchandise. But, if your cost does not reach £1,000in a year, your business would be categorized as a limited-cost business. No matter if the amount is more than 2% of your turnover. Businesses of this nature are obliged to pay a 16.5% Flat rate, which is relatively a higher percentage.
Therefore, we conclude this as a disadvantage of the scheme. For a business that spends very little in a year, for example, any service provider business, the rate is much higher.
How do you calculate Flat VAT?
First of all, you should know the rate as per your business type. Different industries classify at different rates. For example, rates vary from 4% to 16.5%, depending upon the business’s nature and its expected turnover. After you’ve found out your respective rate, multiply your Flat rate by Vat inclusive turnover.
Here, Inclusive turnover is different from regular turnover. An inclusive turnover means total sales, including VAT, paid before making that income. You charge VAT from your customer as usual.
What if your business relates to more than one kind?
Let’s suppose you manufacture food and sell it on the wholesale level, thus, being Manufacturer and Wholesaler at the same moment. The flat rate percentage for manufacturing food is 9%, while wholesaling food is 7.5%. Now, what you have to do is choose the percentage of your majority of sales and apply it to your overall turnover.
Businesses who are using this scheme cannot claim VAT usually. But if the industry has purchased assets worth more than £2,000 and has also paid VAT during purchases. Then this is the only case VAT claim works on that purchase. Otherwise, with a flat rate used, there is no claim back option.
Be a responsible business entity!
- You must charge the right amount of Vat from your clients.
- Pay VAT on the right date and avoid surcharges.
- Do not commit any VAT offense; this might make you suspend from certain schemes.
- Try to follow the rules of “Make Tax Digital for Vat” if you could.
- Generate a valid, day-to-day audited VAT account.
Another major point amid the business transactions is when businesses deal (import/export) with countries out of EU legislation. They cannot charge VAT from them. Get More Info about UK VAT from the official UK government website.
Also you can check Vat Calculator South Africa.
FAQS regarding VFR scheme:
How do I join the Vat Flat Rate Scheme?
To join the scheme, first, you have to check your eligibility described above. Then decide whether you want to register online or formally. For e-filling, visit the official websites and choose your desired scheme. You can also seek guidance from an accountant or tax adviser.
Which scheme is best?
The best scheme depends on your business’s nature and magnitude, although the Flat Rate Scheme seems much profitable. However, there are some other schemes as well:
- Annual Accounting VAT scheme.
- Cash Accounting Scheme
- Standard VAT Accounting Method.
- VAT Margin Scheme.
- VAT Retail Scheme.
How do I change the VAT scheme with HMRC?
To change the scheme, you should:
- Choose the appropriate scheme.
- Submit your request
- Provide your VAT number.
- Expected turnover, and
- Details of how frequently you submit VAT.
This procedure could be used on online websites as well.
How do I pay less Vat?
No doubt, tax payment eats up a big chunk of income, and every potentially growing business tries to minimize the tax. Here are some tricky strategies for you to help:
- Avoid late VAT payments to avoid paying surcharges eventually.
- Use schemes; the one that fits your business the most.
- Do your homework; be very well-prepared when you try to expand into a new market.
- Keep your business activities focused, and be aware when you reach the VAT threshold.
What is the benefit of being VAT registered?
Registration gives your business a trusted place. It will make your business entity stand out when it comes to goodwill. By being VAT registered, you picture your business as one responsible and ethical existence.
Also, it will help in maximizing your sales and revenue. The policies are for the betterment, and they help the business grow in a very strategic manner.