VAT Guide for SMEs
The most important aspect of VAT compliance for SME’s operating with in the U.K. is to choose the correct VAT scheme. There are currently 3 main options, which are:
There are various advantages related to each scheme depending on the nature of the business that you operate. We will examine some of the basic principles of each scheme below.
Standard VAT Accounting
This VAT scheme enables companies that sell products to the general public, to calculate VAT due using point of sale and direct calculation methodologies. However this VAT scheme can only be used if annual turnover is under £130 million.
You also need to complete a VAT return every quarter and if you are using standard VAT accounting. These VAT returns need to include output tax which is the VAT that you have charged to your clients and customers, and input tax which is the VAT that your company has been charged on the products or services that you have purchased during the quarter.
The Flat VAT Scheme
This VAT rate has been specifically designed to help small businesses, by making it easier for them to record VAT sales and purchases. Companies using this system of VAT payment apply a single percentage to their turnover in a VAT period.
The main benefit for SME’s is that this VAT scheme reduces the time it takes them to complete their VAT returns, and allows them to have greater visibility over cash flow as they can more easily calculate their exact VAT liability.
Cash Accounting Vat Scheme
Using this scheme, you do not need to pay any VAT until your customer has paid you. You can also reclaim VAT on your purchases when you have paid your supplier. You are not able to use this system if your annual turnover is above £1.35 million.
The main benefit to companies of this VAT system is that they can delay payment of VAT to HMRC until they have received full payment of the good and services that they have sold. This enables organisations to pay VAT in the quarter that they actually receive payment, and not the quarter in which the invoice was created.
This is just a small example of the various VAT systems that your company could operate within. For more detailed information we would suggest that you visit the HMRC website for a full breakdown of every applicable VAT system for companies trading in the U.K.
The below video produced by HMRC, outlines the help and support available for new and growing business that HMRC currently provides. We appreciate that some of this might be fairly basic information; however we hope you find it informative.
In 2010 the British Government attempted to simplify the TAX system for those operating within the SME sector. The Office Of Tax Simplification (OTS) which was established in 2010 and was tasked to conduct a review of the of the current TAX procedures for small businesses.
In 2012 they compiled this report focused on making the entire tax process much more simplified for small businesses in Britain.