What is VAT and Making Tax Digital?
A business is either VAT registered or it’s not. If it’s registered it must add VAT to all of its sales but it can claim back the VAT it incurs on most of its costs.
A VAT registered business is simply acting as a tax collector for HMRC and generally businesses should be indifferent to VAT.
But to many VAT registered business owners it doesn’t always seem that way.
How to comply with MTD
From April 2019 businesses with a taxable turnover greater than £85,000 need to follow the rules for Making Tax Digital for VAT (MTD).
All financial records must be stored digitally (easily done if accounting software is used) and VAT returns must be submitted from within approved software.
From April 2020 all VAT registered businesses need to follow the MTD rules – regardless of turnover.
There’s been a lot of bluster about MTD but we think it’s very simple. It’s all about bookkeeping.
If you’re not sure if you are compliant or need help choosing software (we are Quickbooks Pro-Platinum Advisors and Xero accountants), get in touch with our team to get started, the phone numbers are below.
VAT is all about bookkeeping and two bank accounts
We recommend all VAT registered businesses use accounting software. Straight away this deals with keeping accounting records in digital form.
More importantly, you can run reports that tell you how your business is performing and use that information to improve performance, increase profitability and improve cashflow.
The accounting software will also produce your VAT return.
Say goodbye to spreadsheets and switch to accounting software now.
Two bank accounts
When a VAT registered business sends an invoice for £1,000 it must add on VAT of £200. When that invoice is paid, £200 of the £1,200 paid belongs to HMRC and the remaining £1,000 belongs to the business.
The business could place this £200 into a tax-savings bank account and keep it separate from the main bank account.
Of course the business can deduct from the £200 the VAT it has suffered on its costs so the full £200 won’t be owed to HMRC, it will be a lower figure.
So a better answer may be to put £150 of the £200 into the tax-savings bank account.
You get the picture.
Put a substantial proportion of the VAT element of the money you receive into a tax-savings bank account and you’ll always have the money to pay your VAT bill.
Meanwhile, your main bank account will have less money in it which will focus attention on improving cashflow.
And, as previously mentioned, doing your bookkeeping in an accounting software package will make this easier.
What is the cash VAT scheme?
There are several VAT schemes aimed at helping businesses with the administration of VAT. Many are industry-specific but a scheme that’s generally available to smaller businesses is the Cash VAT scheme.
You only pay to HMRC the VAT on your sales invoices that have been paid to you in a VAT quarter. But you can only reclaim the VAT on payments actually made to suppliers.
If you live in a permanent state of poor cashflow then the cash VAT scheme can help alleviate some of the problems.
That said, if you’re living in a state of poor cashflow then you should change your business model to improve cashflow, peace of mind and profitability.
How can an accountant help with your VAT?
You may be VAT registered and confused. Or not VAT registered – and more confused!
Either way, for a clear-eyed view of how to manage VAT in your business please call Michael Austin – 020 7125 0270 / 020 8166 5960.
Our VAT services include:
- Making Tax Digital compliance
- VAT registration – voluntary or compulsory
- Planning for compulsory VAT registration if you sell mainly to consumers
- Reviewing available VAT schemes
- Liaising with HMRC
In the meantime, take two minutes to see what we have to say about bookkeeping in an MTD world and why it’s time to ditch the spreadsheets: