Once your business is registered for VAT you must keep full and accurate records. Some people enrol on a short course, or go through it with a book-keeper or accountant because it appears daunting at first, but actually it is pretty straightforward, especially if you are doing the book-keeping anyway. This article aims to help you set up basic VAT records, lay out invoices correctly and generally get to grips with the paperwork.
VAT paperwork
It is important to be methodical and systematic with the paperwork and keep on top of it. As soon as you are registered for VAT you must charge VAT and each invoice or receipt must show clearly the rate and amount of VAT charged and your invoice number. You must also ensure your VAT registered suppliers do the same on their invoices to you so that you can reclaim the VAT you have paid.
It is vital to keep copies of all invoices or receipts and a note of all the VAT that you have charged and paid. You must also keep a summary of VAT for each tax period covered by your tax return. You have to fill in a VAT return to show how much VAT you have received and paid and send the payment of the balance to HM Revenue & Customs. You must complete a VAT return for each accounting period (this is usually every three months, but if you expect the input tax you pay to be greater than the output tax you charge, you can make monthly returns). VAT return forms will be sent to you before each payment is due and you must return it no later than one month after the accounting period.
You do not have to keep records in any set way, but they must be complete and up to date. They must also be easy for HM Revenue & Customs to inspect and the figures that you have used to fill in your VAT return must be easy to find. Probably the easiest system is to adapt your normal business records to include this information. Records must be kept for a minimum of six years.
What should I put on a VAT invoice?
When you supply goods or services on which VAT is chargeable to another VAT registered person or business you must give them a VAT invoice. This must normally be issued within 30 days of the date you make the supply. It must include a sequential identifying number, your name, address and VAT registration number, the date of issue of the invoice and the time of supply (tax point) – if different from date of issue of the invoice. In addition, you must also show your customer’s name (or trading name), address, a description of the goods or services supplied , the unit price, the rate of any cash discount offered, the total amount of VAT charged and the gross total amount payable, excluding VAT. Furthermore, for each description of goods and services you must show the quantity of goods or extent of the services, the rate of VAT and the amount payable, excluding VAT. Further information is required if you are invoicing EC customers.
What is a VAT account and how do I keep one?
A VAT account is simply a summary of the totals of your VAT on sales (known as output tax) and VAT on purchases (input tax). This information helps you complete the VAT return at the end of each tax period.
Choose a method of keeping your accounts that suits you – there is no set way – but keep it simple. You should add up the VAT in your records and transfer the totals to your VAT account under separate headings for input and output tax. At the end of each accounting period you subtract your input tax from your output tax and record the difference.
Keeping records for different VAT schemes
You may decide to use one of the special accounting schemes, depending on the nature of your business. Basically there are four schemes outlined below.
The annual accounting scheme
Under this scheme you only need to file one VAT return each year. Normally you make nine interim VAT payments at monthly intervals during the year – based on an estimate of your total VAT for the year – with a balancing payment due when you submit your return. The main benefits of this scheme are that it is easier to manage cash flow because you pay a regular, set amount. You also have two months to submit your return after the year end, and you can choose your VAT return year end to suit your business. Obviously this scheme is not suitable for businesses that usually get repayments of VAT as they would have to wait a whole year before getting any money back! You can use this scheme if your annual taxable turnover is not expected to exceed £1.35m.
Cash accounting scheme
Under the cash accounting scheme you account for the VAT on the basis of payments you receive and make, rather than on invoices you issue and receive. The main benefit of this scheme is that you do not have to pay VAT on invoices you have issued until your customers pay you, although it also means you can’t reclaim VAT on purchases until you pay your suppliers.
You can use this scheme if your taxable turnover is not more than £1.35m and meets certain conditions. You don’t need to apply to use this scheme and you can change it at the beginning of any tax period.
The flat rate scheme
This scheme aims to reduce the time you spend accounting for VAT and allows you to calculate your VAT payments as a flat rate percentage of your turnover. The percentages are decided by the trade sector you are in. The main benefit of this scheme is that it reduces the time you spend accounting for VAT because you do not have to record the VAT charged on each individual purchase and sale. Businesses in their first year of VAT registration can receive a 1% reduction in the flat rate. This scheme is useful for businesses which have an annual taxable turnover subject to VAT of not more than £150,000 and total turnover is not more than £187,500. Simply download VAT 600 FRS from the HMRC website. This scheme does not suit all businesses and you should seek appropriate professional advice before embarking on it.
Retail schemes to make selling to the public easier
It can be difficult to issue a VAT invoice for each sale if you sell directly to the public and there are several schemes to help with this. The main benefits are that they provide an alternative to standard VAT accounting rules, which might be difficult or costly to follow and you will not have to issue VAT invoices unless someone specifically asks for one.
