About VAT
Value added tax – VAT. The majority of things we purchase have VAT on them and, if you’re in business, charging, recording and paying VAT is something you’ll need to do.
The current standard VAT rate in the UK is 20%, which is applicable to most goods and services. The reduced rate, 5%, applies to some goods and services, such as home energy. The zero rate is saved for things like the majority of the food we buy and children’s clothes. Some goods and services are exempt from VAT, like insurance and education.
For the majority of people who fall into the pool of standard VAT, if they’re VAT registered, there are hoops to jump through and things to consider in order to keep compliant from a VAT point of view, you must:
- Charge VAT on all goods and services you sell
- Keep compliant accounting records
- Complete VAT returns for the specified period, e.g. quarterly or annually
- Pay your VAT bill in the specified period
- You can claim back the VAT on goods and services you buy
VAT can be a drain on cash flow, especially if you aren’t tracking your cash flow in a forecast (see our other articles for more about cash flow). It’s hugely important, therefore, to ensure you’re not paying any more VAT than you need to.
The basic vAt calculation is
VAT charged out to customers on sales invoices (output VAT) – VAT charged in from suppliers on purchase invoices (input VAT) = VAT to pay to HMRC
A lot of businesses fall foul of paying too much VAT for a few reasons that are easily fixable. If you experience any of the following it’s likely you’re one of these businesses:
not asking for a vat receipt
The card receipt you are given when you pay for something tells you how much has been taken from your card, but not what you’ve brought.
To claim the VAT back on something you’ve bought you need a receipt that says what was purchased, the VAT registration number of the supplier, the date of the purchase, the VAT rate on the purchase and how much you paid. This is what you need in order to claim the VAT back on that item.
It’s good practice to ask for this even if you’re not VAT registered, because it gives the full detail of what you’ve purchased. If you are VAT registered though, you NEED this! This is how the amount of VAT paid will be recorded in your VAT return.
Not getting VAT receipts, and submitting card receipts for your books or expenses instead, means you’re going to be paying more VAT than you need to.
Battling with paperwork
Do you, or your staff; travel, go to meetings, work at a customer’s site? Do you incur expenses while you’re out and about? Do you receive invoices through the post and on email? Do you have some invoices that you have to download from supplier websites in order to record them in your accounting system?
If you answered yes to any, or all, of those questions how’s that going for you? Do you find you’re constantly battling to find bits of paper, or the time to download invoices, or to find them all out in your email inbox?
Missing paperwork is one of the main reasons VAT isn’t claimed. It doesn’t have to be like that though. There are paperless expenses systems out there that can help. We give a piece of software called Dext to all our clients, to help them collate their paperwork. Using something like this helps you to collate your paperwork as you go, so your VAT return can be done easily and be more accurate.
Dext specifically is HMRC compliant as well, meaning it keeps the image of your receipt on your account for ten years, so if you throw the receipt/invoice away, or lose it, after it’s uploaded that doesn’t matter.
What Dext can do:
- Take pictures of your receipts while you’re on the move
- Forward email invoices (attachments or in the body of the email) into the system
- Fetch function; log into your suppliers, e.g. Amazon Business, and connect your account to Dext – it will then bring back new invoices each week, so you don’t have to download invoices to record them
We set up a new client with Dext who had multiple members of staff working on customer sites nationwide. They had a member of staff spending 2 days a week chasing people for paperwork for the VAT return. The paperwork was often lost or unavailable. Since moving to Dext they’re saving between 5% and 20% on their VAT return every quarter. They’re also saving time not having to chase people for paperwork.
We love Dext – check it out more HERE.
Not having the want or time
The bookkeeping and VAT returns are often one of the things left to the last minute in business. This is often because people don’t like doing it, or they don’t have time to do it. Either way, leaving it to the last minute means it’s a rush.
Things done in a rush are, most often, not done to the best quality. Forcing yourself to do something you really don’t want to do often results in it being done to a poor quality as well. There is a high probability that while you’re rushing, you’re not accurately recording everything from a VAT perspective as well.
Poor VAT records can mean you’re overpaying VAT. They can also mean you’re putting your business at risk if you were ever to be VAT inspected by HMRC.
Knowledge gap
VAT was originally intended to be a simple tax, when it was implemented in 1973, however in reality it’s a different beast.
VAT can be complex, the rules and regulations have become more intricate over time. Do you know it’s so complex that accounting firms have specialists and all they deal with, day in and day out, are VAT issues.
If you’re doing your own VAT returns, and you’re not 100% sure on the intricacies and complexities of all the VAT aspects your business is subject to, you could be overpaying VAT and not knowing it.
If you’re battling with an accounting software system you’re not 100% comfortable with using, or using one that no one has even shown you how to use, you could be overpaying VAT as a result.
You could also be putting your business at risk from a VAT inspection point of view, if bookkeeping records aren’t accurate.
What’s the fix?
If you’re experiencing any of these issues, or are worried you’re overpaying VAT, what can you do about it? Here’s some quick fixes:
- Always ask for a VAT receipt or invoice
- Accurately record your invoices and receipts – use software to help
- Don’t leave it all to the last minute – it’s important, take the necessary time to do it
- Seek out help if you’re unsure
And the easiest fix,
Use a qualified, quality accountant or bookkeeper
Using a qualified person to support you with bookkeeping and VAT returns is the easiest way to ensure you’re not paying too much VAT. They have the skill and expertise to help you and your business get it right, and not pay anything unnecessarily.
Evaluate the Cost Benefit Analysis on this (article HERE):
- How long does this take you?
- How much is your time worth/could you be earning more in that time?
- Are you potentially paying too much VAT?
- How much would it cost to have someone do it for you?
- Does the benefit of a skilled person doing it for a cost, outweigh the cost to you and your business? No brainer then, isn’t it!
We provide quality bookkeeping services, with Xero and Dext included free of charge – if you’d like help getting your bookkeeping records right, so you don’t pay too much VAT, get in touch. We can definitely help!
Check out our bookkeeping service HERE.