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It is a preconceived notion that Value Added Tax (VAT) is a huge
burden for small businesses, but once a person is registered and as long as the
accounts are organised, it needn't be too onerous. Essentially a business that
pays and charges VAT is acting as a tax collector for the government. A
business hands over the difference between the amount of tax charged to
customers and the amount that the business has paid to suppliers. VAT returns are usually made on a quarterly basis, supported by a VAT
account. All the VAT invoices to customers during the period of the return are
totaled to calculate the output tax; then all the VAT charged by suppliers is
totaled to calculate the input tax. The amounts are set off against each other, and the remainder is
either paid by the business to HM Revenue & Customs (HMRC) or is claimed as
repayment. However there are certain restrictions on what input tax can be
claimed back on. Tax cannot be claimed for: - Supplies for private use
- Supplies for another company
- Non-recoverable items, such as entertainment and cars, unless
used solely for business purposes
Record keepingThe most important requirement
for VAT registered businesses is accurate record keeping from the outset. It's
far easier to record whether an expense is for private use, entertaining or
business at the time you enter it into your book-keeping/accounting
system.If your records are correct, VAT returns take 30 minutes on a
computerised system. If they're not, no amount of computing will save you
having to trawl through your records! Most companies use computerised accounting systems and once set up
these account for the VAT on each transaction as it's made. Compiling a VAT
return is thereafter an automated procedure taking but a few minutes. If you are running a manual system then you should use different
columns to list different VAT categories. Larger and specialised stationers
sell special "spreadsheet"-style books with pre-printed columns for different
VAT rates ("VAT analysis pads"). Many businesses keep manual records and then deliver these to their
accountants. In these cases your accountant will discuss with you the best
approach, as well as detailing how to treat the inputs and sales specific to
your business. You can help your accountant and yourself by noting on each invoice
any special instructions. If for example you have a £100 + VAT (£117.50) phone
bill for your home address, this may be 100% business (an internet line, say),
part business (because you're on call, or as a fax line) or totally personal.
If you note the reason on the invoice or receipt then you can be sure your
records are in order against an inspection and your accountant can be sure the
treatment is correct. What options are there?Generally VAT returns
work on a quarterly basis. Another option is the Annual Accounting Scheme: to
qualify the person must have been registered for at least 12 months and not
have a taxable turnover that exceeds £300,000 a year. This is ideal for small
businesses who do not have many transactions.The business will have to make nine monthly payments, which are based
on the return paid the previous year. The business pays 10% of this amount by
direct debit from the fourth to the 12th month of the VAT year. At the end of
the tax year a final balancing payment is made if VAT is still due. For businesses whose turnover is less than £100,000 annual accounting
is even more simple. Four instalments are made over the year equal to one-fifth
of the previous year's VAT bill. If the bill was less than £2,000 there is an
option to make one payment when the annual return is made. A person who is liable for tax can also pay VAT on the basis of cash
received and paid rather than on the normal tax rules. The person cannot have a
taxable turnover that is greater than £350,000 a year. The advantage of this
payment process is that automatic bad debt relief is given, as VAT is not
payable on a sale unless the customer pays for the goods. Paying the taxAny VAT due is payable within
one month of the end of the accounting quarterly period and within two of the
annual period. If the payment is late a warning is sent out and a Surcharge
Liability Notice will be issued after the first late payment. If another late
payment occurs during the 12 month period, a 2% surcharge may be added to the
amount of VAT due.
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