There is nothing glamorous about setting up your VAT, and very often we put it on the back burner. Unfortunately ignoring it won't make it go away, and if you get it wrong it can be a real pain in the neck. But by taking some simple steps and setting up your VAT will mean it's one hassle you can cross off your list, confident you are compliant when The Sheriff of Nottingham comes knocking.
Houzz Pro has teamed up with accounting experts at 5 Rivers Accountancy, a member firm of the Institute of Chartered Accountants of England and Wales (ICAEW) who strive to deliver expert tax planning advice with an end-to-end service, taking the hassle out of this time consuming task.
Read on to discover their experts’ best advice for interior designers and construction contractors on managing VAT. So, whether you are 20 years in business and want to sense check, or you’re just starting out and need help setting up your financial systems, these 5 easy steps will ensure your VAT scheme is working for you.
5 easy steps to managing your VAT
Trying to get to grips with your VAT, but no idea where to start? We hear you! With various requirements and regulations, it’s easy to get confused and overwhelmed. We’ve broken down everything you need to know to get started with VAT in the UK.
1. Registering for VAT
First, consider if you need to register for VAT. If you’re in business in the UK and your turnover exceeds £85k in either a rolling 12-month period, or the next 30 days, you need to register for VAT. If your annual taxable turnover is under £85K, you also have the option of registering for VAT. The benefit of registering for VAT, is that you’ll avoid paying VAT on business expenses, and be able to claim back the VAT on business purchases when you file your return with HMRC.
To register you’ll need:
- Your National Insurance (NI) number or your Unique Taxpayer Reference number (UTR)
- Business bank accounts details
Then, you can either register for VAT via HMRC or ask your advisor to do this on your behalf and you will be issued a 9-digit VAT number.
2. Choosing the right scheme that works for you
Once you’ve registered, you’ll be asked which accounting scheme you’ll be using, so HMRC can calculate whether you owe VAT or are owed a refund. Most businesses will record the VAT obtained on each sale, and paid on each purchase, and then submit a VAT return quarterly.
However, there are also a number of other schemes that businesses can opt for:
- Annual – You pay fixed amounts over 10 months and do 1 return with the final payment at the end of the year.
- Monthly – This is extra work, but great if you are a company that gets repayment from HMRC and it can help with cash flow.
- Flat rate scheme – simplified scheme for small companies with reduced admin.
- Cash accounting scheme – follows cash in and out of the business versus the standard accrual scheme.
The application to these schemes will depend on your business circumstance, and each has their own pros and cons. Speak to your tax advisor to understand the best one for you.
3. Keep accurate, up to date records
Good record keeping is very important for any business, especially if your
services mean you claim back more VAT than you charge in order to get a VAT refund from HMRC.
HMRC do spot checks, particularly if you claim a refund, and will want to check invoices, bank statements, receipts and that bank reconciliations are being done.
Not keeping records that are accurate, complete or readable can lead to financial and legal consequences. HMRC can issue high penalties where mistakes are made with VAT filings and if you don’t keep record for the required periods of time. That's why it’s essential to adopt an efficient and accurate accounting system to ensure your companies filings are error-free.
If you happen to lose a VAT invoice, or it is damaged and no longer readable, ask your supplier to send a duplicate (and mark it as ‘duplicate’).
VAT-registered businesses must keep records of:
- Sales and purchases.
- A separate summary of VAT, known as a VAT account, that gives details of sales, purchases and amounts owed to/by HMRC as well as any bad debts that are written off.
- Copies of all VAT invoices issued.
- Copies and details of any self-billing agreements.
- Debit or credit notes.
- Import and export records.
- Records of any items where VAT cannot be reclaimed and of any goods given away or taken from stock for private use.
- Records of all the zero-rated, reduced or exempt items you buy and sell.
- General business records e.g. bank statements, cheque stubs, till rolls
Houzz Pro is integrated with bookkeeping systems, Xero and QuickBooks, allowing you to easily sync your estimates, invoices and payments from your Houzz Pro account to your chosen accounting scheme. As well as eliminating the need to do double entry between your two tools, this latest integration improves accuracy, so you can be sure your accounts and VAT records will be error-free and up to date.
Syncing each and every business expenditure not only saves you time, but also helps you avoid mistakes by ensuring every key transaction is accounted for. Houzz Pro’s built-in error centre goes one step further in solving inaccuracies and offering solutions to core problems.
4. Check you are being charged the correct VAT rate
The standard rate for most goods and services in the UK is the 20% rate, but there are a few more rates that you should consider especially in the construction sector:
5%
The reduced rate VAT of 5% to be charged if you are:
- converting a building into a house or flats
- installing energy-saving products
- renovating an empty house or flat
Zero
If you are building a new house or flat or working for disabled people in in their home, then you would charge 0% rate VAT
Exempt
This usually applies to financial products such as insurance and bank charges
Domestic reverse charge
From 1 March 2021 the domestic VAT reverse charge must be used for most supplies of building and construction services. \ Which come under the Construction Industry Scheme (CIS).
It does not apply to the work of professional services such as Interior or exterior decorator and landscaping consultants, architects, surveyors, or of building, engineering consultants where supplied on their own
However, if your work is under the CIS scheme This means:
- The end customer e.g main contractor pays the VAT for construction services to HMRC not to their supplier eg construction subcontractor
- The charge applies to standard and reduced-rate VAT services but not zero rate
- For individuals or businesses who are registered for VAT in the UK reported under the Construction Industry Scheme (CIS)
5. Have MTD linked software
From 1 November 2022 you will need to sign up to Making Tax Digital (MTD) and use compatible software to keep your VAT records and file VAT returns.
You will no longer be able to use your government gateway account to file these returns, so it is key to move your system and processes to digital in order to comply with these regulatory changes. If you don’t, you could be charged a penalty by HMRC for not keeping your records in order.
Thanks to Houzz Pro’s integration with Xero and QuickBooks, two of the UK’s most relevant and popular digital bookkeeping tools, you can rest assured you’ll be able to file VAT returns in compliance with the new regulations.
Conclusion
As you can see there is more to VAT than a straight-forward 20% charge. Knowing the ins and outs of VAT and keeping on top of it all while you’re running your business can be challenging. For more help and information, get in touch to learn how Houzz Pro can assist with your bookkeeping and help you run a more profitable business.
The information contained in this article should not be relied upon as legal, business, or tax advice. We encourage you to seek guidance from your legal counsel, business or tax specialist with regard to how the information contained in this article may or may not apply specifically to your business.
