Not all funding options for company cars are suitable for businesses not VAT registered. Contract Hire and Finance Lease in particular give distinct advantages to VAT registered businesses.
A new start business therefore needs to weigh carefully the pros and cons of VAT registration. Here are a few facts including some rules.
Value Added Tax (VAT) is a tax on the final consumption of certain goods and services in the home market but is collected at every stage of production and distribution. Most business-related goods and services will therefore be subject to VAT. There are several UK VAT rates, the standard rate being 17.5%.
Registration for VAT is compulsory when the annual turnover, calculated to the end of any month, exceeds the registration threshold, currently £64,000 (from 1/4/2007). It is important that the turnover is carefully monitored, so that registration can be effected promptly. A common mistake is either to wait until the end of a calendar quarter, or, worse, to wait until the annual income tax return.
There is a further rule, sometimes missed, where registration is obligatory based on future turnover. This applies where a person expects that, in the next 30 days, his turnover will exceed the threshold, again £64,000. The 30 day period can start at any time. This rule will affect a person where a large contract is under discussion with a customer. Under this rule, registration is required immediately, so that the large contract, for example, will be subject to VAT.
Even if your business turnover lies below the current threshold, you can still register for VAT, since there may be business benefits in doing so (worth checking with your accountant or direct with HMRC). You have to satisfy HMRC that you are carrying on a business, or intends to carry on a business, and that you are making taxable supplies. Satisfactory evidence will need to be provided. Usually a covering letter is helpful, to pre-empt any questions that HMRC may wish to ask. As many as 20% of all VAT registered businesses fall into this category.
Basically, a business will pay VAT on all purchases it makes (known as ‘input tax’) and then charge VAT on all sales it makes (known as ‘output tax’). If a VAT-registered business receives more output than input tax in a VAT period, it will pay the difference to the Customs and Excise, otherwise the C&E will refund the difference if the business pays more VAT than it receives.
Once you are VAT registered, you will need to update your invoicing templates to take account of the additional tax you need to charge your customers. Most businesses will receive a green VAT return every quarter – you should then send your calculations to Customs, and pay any VAT owed (or claim a refund).
Where a person fails to notify his liability to register for VAT, he is liable to a penalty. This is calculated at 5%, 10%, or 15%, depending on the delay between the date of registration and the date HMRC received notification. 5% applies up to 9 months, 10% from 9 to 18 months, and 15% for a delay over 18 months. Since postal and other delays seem to occur all too frequently, a copy of the notification should always be kept, and a note made of the date on which it was dispatched.
A penalty can be mitigated or cancelled in total if there are genuine circumstances which prevented the person from submitting his Application at the correct time.
Regulations allow a person to reclaim input tax incurred prior to registration. Although this may be seen as a concession, it gives an effective statutory right to such input tax. The conditions attached to the making of such a claim are found in VAT Notice 700, section 11. This provision can be very helpful for a growing business.
Where the input tax relates to goods purchased, they must have been purchased within three years of registration, have been obtained for the purpose of the business which is registered, and still held in stock. A stock account of the goods will need to be completed, and proper VAT invoices must be maintained. This necessarily excludes goods that have been consumed before registration, such as petrol or electricity. However, it does include goods that have been incorporated into other goods, such as office improvements, computer upgrades, etc.
The rules for services are slightly different, as a claim can only go back six months. Again those services must relate to the business which is registered for VAT. And again, a record of such services should be prepared.
A claim for input tax under these rules must be made on the first VAT return. In practice, such a claim can be prepared at around the time the business is registered, so that the necessary evidence can be collated, and the stock account prepared.
Where the amounts of input tax are significant, HMRC may wish to verify the claim before making repayment. Where such a claim is submitted, it is good practice to prepare relevant information so that any check can be made easily.
All of the documents can be obtained from us in a word format, so that they can be personalised and edited to suit your company or business. This service is free of charge, on request or phone 01908 262662.
Webcars is a trading style of LVC Central Ltd. | Tel: 01908 262662
