Tax and NI

11. VAT

Unless a specific relief applies, VAT is payable on all sales (of goods and services) and is recoverable on most purchases.

The reliefs are laid down in legislation. They are 'exempt supplies' which include health, finance, insurance, education and many property transactions; 'zero-rated' (VATable at 0 per cent) on food, children's clothes, new houses and printed matter; 'reduced rate' payable at 5 per cent on items including domestic fuel, insulating products, safety seats and certain conversions/refurbishments.

11.1 All businesses must pay VAT, but only those that are VAT-registered can reclaim it.

• Businesses - whether companies, sole traders or partnerships - must register once their annual turnover exceeds the VAT-registration threshold (currently £73,000).
• VAT-registered businesses must charge VAT on their sales of VATable goods and services, and account for the tax to HMRC.
• They may deregister if their annual turnover falls below a certain limit (currently £71,000).
• Businesses with a turnover below the VAT-registration threshold may choose whether to register. They have to weigh the advantages (the ability to recover VAT) against the disadvantages (having to charge VAT, and the costs of administration).

11.2 Certain small and medium-sized businesses have the option of using the cash accounting system.

• The amount paid in VAT is based on sales revenue actually received, while the amount recovered is calculated according to the invoices that have been paid. This avoids problems that can otherwise arise with late payment or bad debts.
• The scheme is open to businesses with a turnover of up to £1.35 million that meet the conditions in HMRC's Notice 731. The leaving threshold is £1.6 million.
• Eligible businesses do not need to apply to use this scheme but must start from the beginning of a VAT period.

11.3 Small to medium-sized businesses can choose annual accounting, rather than submitting quarterly returns.

• The same threshold limits apply as for the cash accounting scheme.
• Any business under the threshold can use the scheme from the date of VAT registration.

11.4 A flat-rate scheme is available for small businesses.

• It is available to any VAT-registered entity with an annual VATable turnover of up to £150,000.
• The net VAT payable to HMRC is calculated as a percentage of turnover (which is specified by HMRC) rather than being the net difference between the VAT charged and incurred on individual transactions.