Tax and NI

11. VAT

VAT is payable on most sales (of goods and services), and recoverable on most purchases.

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

• Businesses must register once their annual turnover exceeds the VAT-registration threshold (currently £67,000).
• VAT-registered businesses must charge VAT on their sales of standard-rated goods and services, and account for the tax to HM Revenue & Customs.
• They may deregister if their annual turnover falls below a certain limit (currently £65,000).
• Businesses with 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 the problems that can otherwise arise with slow payment by customers, or with bad debts.
• Businesses with a turnover of up to £1.35 million may apply to use this system.
• Businesses need to meet certain conditions before cash accounting can be adopted.

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

• Businesses with a turnover of up to £1.35 million may apply to use this system.
• The leaving threshold is £1.6 million.
• Any business under the £1.35 million 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 businesses with an annual taxable turnover (excluding VAT) of up to £150,000. Their total income (including VAT, exempt supplies and other income) must not exceed £187,500 a year.
• VAT will be charged as a percentage of turnover based on specific trade sectors, rather than on individual transactions.