Valued Added Tax (VAT) is a tax applied to the sale or purchase of goods, services and other taxable supplies.
If you are VAT registered, VAT is charged on your sales and collected on behalf of HMRC. You are able to offset the VAT on your purchases before paying the balance over to HMRC. If you pay more VAT on your purchases than you charge on your sales, you will be due a VAT refund from HMRC.
If you are not VAT registered, you will not charge VAT on your sales and not be able to reclaim the VAT paid on your purchases.
If your business turnover exceeds the VAT threshold (currently £85,000), you must register for VAT and charge VAT on the sale of your goods or services.
Approaching the VAT threshold
For Businesses that are not VAT registered as turnover is below the VAT threshold, you should keep an eye on your turnover on a monthly basis.
It is your responsibility to monitor your sales and turnover. As your Accountant, we are not likely to review your Sales and notice that you have exceeded the VAT threshold until it is too late.
If you exceed the VAT threshold and need to apply for a backdated VAT registration, you will have to retrospectively add VAT to your sales from the point at which you exceeded the threshold.
It is therefore important to monitor your turnover and register for VAT as soon as you approach the threshold. Let us know… We can help with your VAT registration!
When registering for VAT, you will be issued with a VAT registration number and VAT certificate. This will detail the VAT quarters for which you need to submit VAT returns (if choosing to submit quarterly returns) in addition to your registration details.
We’d recommend immediately adding your VAT scheme to your Business Government Gateway Account, so you can monitor your VAT liability and link your Government Gateway Account to your Cloud Bookkeeping software to submit your VAT returns electronically to HMRC in compliance with Making Tax Digital (MTD) requirements.
Claiming VAT Pre Registration
It may be possible to reclaim input VAT pre your VAT registration.
From the date of registration, you are able to reclaim VAT for:
- 4 years for goods you still have or that were used to make other goods that you still have
- 6 months for services
You can only reclaim VAT on purchases for the business now registered for VAT and must have copy invoices, receipts and information about how they relate to the business now.
What can I claim VAT on?
You can usually reclaim the VAT paid on goods and services purchased for use in your business if you are VAT registered and the purchase is for business purposes.
VAT can be reclaimed on staff entertainment, but is blocked for business entertainment as below.
VAT can be reclaimed on employee travel expenses for business trips including meals and accommodation.
VAT may be reclaimed on a new car if used for business. The car must not be available for private use. VAT on car leases is usually restricted unless it is proved that it is used 100% for business purposes.
What is blocked for VAT recovery?
You cannot reclaim VAT on purchases that do not relate to the Business. This includes items purchased for personal consumption.
Where you undertake Business Entertainment or Director only or Partner only entertainment (with no employees present), VAT recovery is usually blocked.
Items with mixed Business and Personal use may be able to enjoy a pro rata proportional VAT reclaim.
There are a number of VAT schemes that you may choose to use.
Standard Scheme – You pay VAT to HMRC when you invoice your customer and when suppliers invoice you.
Cash Accounting Scheme – You pay VAT to HMRC when your customer pays you and when you pay suppliers quarterly. Your turnover should be £1.35m or less.
Annual Accounting Scheme – You pay VAT on account to HMRC and then complete an annual VAT return to work out the balance owed by you to HMRC or by way of refund from HMRC. You can join the scheme if your turnover is £1.35m or less.
Flat Rate Scheme – You charge clients VAT in full, but pay a fixed rate of VAT to HMRC and cannot reclaim the VAT on your purchases. You keep the difference between what you charge customers and pay to HMRC. Your turnover must be below £150,000 and you must apply to HMRC to join the scheme.
The VAT Return
Depending on the VAT scheme that you have opted for, you will need to prepare and submit your VAT return using your Cloud Bookkeeping software.
The Ascentant VAT Return process
Where we undertake your VAT returns on your behalf, we will diarise your Quarter end date and follow up with you to make sure all of your records are upto date.
We cannot begin working on your VAT return until all of your Bookkeeping for the Quarter or VAT return period has been complete. This will mean:
- Ensure all sales invoices are posted
- Ensure all purchase invoices and expenses are posted
- Ensure all credit card or Payment accounts are reconciled and posted
- Ensure any collection feeds are posted and reconciled such as GoCardless or Stripe
- Ensure all bank receipts are allocated against sales invoices
- Ensure all bank payments are posted
- Ensure all direct debits are posted
- Ensure the system Cashbook matches your Bank Statement
We cannot prepare your VAT return until this is complete.
We will then review your VAT return for any mispostings or items where VAT has been claimed that is blocked for VAT recovery.
We will also need to sample or audit VAT invoices where input VAT is being claimed on purchases. We will usually need to see the top 10 invoices by value where input VAT is being reclaimed.
You should ensure that copy invoices are available as part of your general Bookkeeping in your Cloud Bookkeeping software regardless…
Once all transactions are posted and reconciled, we will be able to audit your transactions and prepare your draft VAT return.
We will email your draft VAT return for review and advise of the amount of VAT payable to HMRC or to be reclaimed from HMRC.
Once any queries have been dealt with and you are satisfied with your VAT return, it should be approved by email.
We will then file your VAT return to HMRC.
Payment of VAT
If you have a direct debit set up, HMRC will collect your VAT liability automatically.
If you need to make a manual payment, ensure you diarise the payment date or pre set a payment in your bank to make the payment. The VAT return and payment should be filed and paid one month and seven days following the end of your VAT quarter.
Once you’ve sold your business and have received the funds from the sale, you’re then faced with a big question: what happens next?
After guiding the helm of your company, it will be tough to let go. But if the circumstances are right, there’s no reason why exiting the business should be a sad occasion. You’ve built a stable business and personal legacy. You’ve employed a team of talented people and helped them drive their careers. And you’ve brought your products and/or services to a satisfied and loyal customer base.
So, how will you now focus your time and effort? Let’s look at your options…
Retire and live out the entrepreneur’s dream
After many years of hard work, worries and stress, the thought of a business-free lifestyle may well be appealing. But retirement isn’t for everyone. If you have thrived on the pressure, challenges and excitement of being the captain of your business ship, retiring may seem like a step away from the action.
On the flipside, the allure of a more relaxed lifestyle may be strong. With the proceeds from your sale, you should be in a position to make you, your family and those around you very comfortable. It may be that the entrepreneur’s dream of building a business, selling up and retiring to a hot climate is your idea of perfection.
Stay involved in the business
Even though you don’t own the business anymore, it doesn’t mean you have to step away completely from the company. You could remain involved in the business in some capacity, allowing you to ‘keep your hand in’ and support the future course of the business.
For example, you could become:
- A joint partner in the business – you could sell a part share in the business and work as a joint partner with your new investor. This allows you to free up some capital, while maintaining an element of control and influence.
- An external adviser or consultant – you could advise the new owner and their board as an outside adviser. After all, who knows this business better than you? Becoming a consultant could well be an astute move and keeps you in the loop with the future path of the business – while charging out a consultancy fee as an added benefit.
- A non-executive director (NED) – you could join the board as a NED and use your personal experience to help guide and support the new owner and their board. If that’s the route you choose, it’s a good idea to retain some shares in the business, so you have a vested interest in the company’s performance and your own share value.
- An informal adviser to your family – if you’re handing the business down to the next generation of your family, they will almost certainly want your advice. You’ve been through the ups and downs of setting up the business, so you’re in the best position to give your family the guidance and tips they need to run a smooth operation.
Set up a new business
With so much experience behind you, it could be that you’re itching to start the whole business cycle again. If you’ve got the ideas, the capital and the motivation to start another new business, this can be a new and rewarding challenge to get your teeth into.
First time around, you’ll have been a little green and less aware of the many pitfalls of founding a new business. You’re now better prepared and more knowledgeable about what’s required from a founder and business leader. We learn plenty from our mistakes, so you’re in a great position to return to the business cycle again with a new idea.
As with any new businesses venture:
- Make sure you have a detailed breakdown of your business idea
- Write an in-depth business plan that maps out your journey
- Ensure you have the funding to get this idea off the ground
- Be prepared for a period of hard work and lower income before the company takes off.
Do your bit for charity and your community
We all have interests and causes that are close to our heart, so supporting charities and community projects in these areas is a great way to use your money for long-term good.
Donating money to your chosen charity or social enterprise is also a triple whammy:
- You get to provide funding to causes that are close to your heart
- You can be philanthropic and help people who are in challenging situations
- You get the positive impact of tax breaks for donating to charity.
You also have the option of putting your own time into working with these charitable causes. You can use your expertise and experience to guide them, help with fundraising or provide hands-on support at events, community projects or lobbying the Government for greater support.
The end of the road, or a new chapter?
Once the business is sold and you close your office door for the last time, you take a step into the unknown. But with so many varied and valuable options to choose from, your life post-exit need never be boring or predictable.
The potential is there for an exciting new venture, or the pleasure of relaxing in the sunshine by the pool. It’s up to you to define the next chapter in your life and your business career.
If you’re thinking about exiting your business, please do get in touch. We’ll help you plan your exit strategy, add value pre-sale and choose the best options for your personal future.
Talk to us about your next step.
Ascentant Accountancy are based in Derby (01332 981920, firstname.lastname@example.org) and Ripley, Derbyshire (01773 424009, Ripley@ascentant.co.uk), call us to see how we can assist.