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VAT - Back to Basics

Taylor’s Toys, a longstanding client of ours, has contacted us as he believes his business may have breached the VAT registration threshold and is therefore required to register for VAT.

Taylor’s Toys is a small toy shop that sells a variety of children’s toys, children’s clothing, video games and confectionary. Business has been steady throughout 2018 but in the build up to Christmas he began to stock slime which has been an instant bestseller. He did not anticipate slime being so popular and he believes this may have tipped him over the VAT registration threshold.

When should Taylor’s Toys register for VAT?

Taylor’s Toys must register for VAT when its taxable turnover exceeds the VAT registration threshold, which is currently set at £85,000. However, a business can register for VAT voluntarily if its taxable turnover is below the threshold.

The business breached the VAT registration threshold on 08 December 2018 and must notify HMRC within 30 days following the end of the month the VAT registration threshold was breached. As the VAT registration threshold was breached on 08 December 2018, the business must notify HMRC by 30/01/2019. The VAT registration will be effective 01 February 2019 unless an earlier date is chosen.

The business was not expecting such a surge in taxable turnover and as such was not anticipating its taxable turnover to exceed the VAT registration threshold for some time. However, if at any point the business had expected the taxable turnover in the next 30 days alone to exceed the threshold it would have been required to register for VAT within 30 days of that expectation arising.

When should Taylor’s Toys start charging VAT?

The business must charge VAT from the effective VAT registration date – this is selected during the application process. If the effective date of VAT registration has been backdated, then VAT is declared on all sales made following the effective registration date.

Some businesses wrongly assume that they do not charge VAT until they have received their VAT registration certificate in the post. However, this can take up to 30 days, at which point they may have undercharged VAT for several weeks.

What if Taylor’s Toys fails to register for VAT on time?

If the business fails to notify HMRC by 30/01/2019 HMRC may issue a penalty. Penalties for failing to VAT register on time are calculated as a percentage of the VAT due, with the percentage increasing depending on the time that has elapsed between the date from when the business should have notified and the date HMRC receives the application.

The penalty percentage is 5% if the business registered for VAT no more than 9 months late, 10% between 9 and 18 months late and 15% more than 18 months late.

If the business fails to register for VAT within the timeframes outlined above, it he will have to declare VAT on all sales made following the point the requirement to register for VAT arose. If the customer is VAT registered it may be possible to issue an invoice for the VAT on top of the sales made as the customer should be able to reclaim this VAT. However if the customer is a private individual or a business that is unable to reclaim its VAT, the VAT due will likely have to be absorbed by the business representing a decrease in profit for Taylor’s Toys. In this instance, the business will need to treat the sale price as gross and VAT is declared at 16.67% (1/6 of the money received).

Are there any special schemes that could make life easier for Taylor’s Toys?

As Taylor’s Toys only makes retail sales it could benefit from using a retail scheme. By using a retail scheme, the business would calculate VAT at the time of preparing the VAT return rather than with each sale. There are three standard schemes available and the suitability will vary based on the type of sales made and how sophisticated the till system is.

There are a number of other special schemes which the business could operate. These schemes include:

  • The flat rate scheme – under this scheme VAT is paid to HMRC using a fixed percentage which is typically lower than the standard rate of VAT. Under this scheme a business would still charge 20% to their customer and they would keep the difference. This amount kept is meant to act as a proxy for the VAT a business would normally reclaim on its purchases. This is because you cannot claim any VAT on purchases under the flat rate scheme (other than capital purchases). This scheme is not really appropriate for Taylor’s Toys as it purchases a lot of stock and also sells zero-rated children clothing which, under the flat rate scheme, would require VAT to be declared at the fixed percentage.
  • The second-hand margin scheme – under this scheme VAT is only declared on the margin (sales price – purchase price), rather than the full selling price. However, this is only possible if the goods were purchased VAT free. The only goods which this would apply to in the context of Taylor’s Toys are second hand toys purchased from consumers.
  • The cash accounting scheme – under this scheme the tax point shifts from the date of the invoice to the date cash is actually received by the business. As the business is retail, invoices and payment typically occur on the same date. As VAT cannot be claimed on purchases until payment has been made by the business this scheme could actually be negative from a cash flow perspective.
  • Annual accounting – this scheme allows one VAT return to be filed per year, rather than one quarterly. However, interim payments are required throughout the year. This reduces the administrative burden of VAT registration, but it can present cash flow problems for business which receive regular repayments from HMRC. We have advised the business not to use this scheme because the seasonal nature of the business means in slower periods the interim payments could be higher than they would be under normal VAT accounting. 

What does Taylor’s Toys have to do now it is VAT registered?

Now the business is VAT registered it must account for VAT on all sales that are subject to VAT. The business can also reclaim VAT on purchases made in the UK. If stock is purchases from outside the UK, the VAT treatment will be different. Goods purchased from suppliers in the EU attract acquisition tax now Taylor’s Toys is VAT registered. This means that the business must charge itself VAT but it can also reclaim this VAT (box 2 and 4 on the VAT return). If goods are purchased from suppliers outside the EU, import VAT will be due at the point the goods enter the UK, unless the business arranges for a deferment account to be set up. The business can recover import VAT through his VAT return as long as a C79 import VAT certificate is received (these are automatically generated by HMRC if an EORI number is quoted on a C88 import declaration). It is also possible for the business to reclaim some of the VAT incurred prior to VAT registration. VAT incurred on services in the 6 months prior to VAT registration can be claimed. The business can also go back 4 years for goods as long as they are still on hand at the time of registration (ie. stock that has not been sold or fittings at the premises).

Taylor’s Toys must submit its VAT return every quarter and pay the VAT owed. The VAT return submission deadline is 1 month and 7 days following the end of the VAT period. For example, the VAT return for the period ending September 2018 is due for submission on 7th November 2018.

From 1st April 2019, the process of compiling and filing VAT returns will change. The introduction of Making Tax Digital for VAT means that business will have to calculate and submit their VAT return to HMRC via API enabled compatible software. We will not go into detail on Making Tax Digital for VAT in this guide, however if you would like more information we have a dedicated page on our website.

If you would like to discuss the above, or any other VAT matter, please contact our VAT partner Alison Birch.

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