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Secret 3 : Know how dangerous being too clever is
It might seem an obvious trick to try to minimise VAT by setting up many companies each of which would be under the VAT limit . However , this isn ’ t allowed . Setting up “ Installers North East London ”, “ Installers North London ” etc . to avoid VAT is disallowed , whether these are separate companies or just trading names .
To be able to qualify as separate businesses , they must be in a different line of work and use different staff . So , someone who had a team of one only doing landlord gas safety certificates and a totally different team of four never doing gas safety certificates but doing installations , upgrades etc might be able to try this .
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They would probably get away with not having the gas safety certificate business VAT registered , provided it had annual sales less than the VAT registration limit of £ 85,000 .
If you think that taking risks with not registering and not charging VAT is worth it , talk to Uber . They are facing an HMRC back VAT tax bill that could top £ 1,500,000,000 . And there ’ s no chance to recover this from their customers . Don ’ t think that something similar can ’ t happen to you albeit on a much smaller scale .
Secret 4 : Choose the correct VAT scheme
The normal VAT scheme is where a business submits their VAT return once every three months based on sales and costs invoiced in that three-month period . These
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are included based on the date they were raised whether or not they have been paid . This is known as the accrual scheme and is the default .
The alternatives are the “ Cash accounting ” and “ Flat rate ” schemes .
FLAT RATE SCHEME
The flat rate scheme only applies where sales are less than £ 150k per annum and must be left once there are “ reasonable grounds for believing ” that sales will go above £ 230k in the next year .
The flat rate scheme means that the business charges a flat rate of VAT on all sales without worrying about VAT on purchases or expenses . The flat rate is set by HMRC for each industry type and in the first year of VAT registration the rate is 1 % less . The flat rate total amount of VAT is simply paid to HMRC . This can be combined with cash accounting described below i . e . pay based on what is received .
The flat rate scheme shouldn ’ t be used when selling to VAT registered entities where a VAT invoice must be supplied . So if a business does any commercial work the scheme probably isn ’ t worth it .
CASH ACCOUNTING SCHEME
The cash accounting scheme can be joined if a business ’ s sales will be £ 1,350k or less in the next year and they have always been up to date with their VAT returns . If sales in the last 12 months go over £ 1,600k then they must leave the scheme to move to the accrual scheme at the end of the next quarter .
The business becomes liable to pay VAT when they receive cash from customers and become able to reclaim VAT when they make a payment to suppliers as opposed to when invoices are raised and received .
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This doesn ’ t work well for businesses that normally have a VAT reclaim , are usually paid as soon as they raise an invoice or have van leases .
Secret 5 : Know how to manage your VAT status
As we saw earlier , if you mainly work with consumers , there is a competitive advantage to not being VAT registered while if you work for other businesses you may want to voluntarily register for VAT .
If you are getting close to the VAT threshold , one way to keep that at bay is to get customers to pay directly for materials . Remember , if you buy a boiler and the cost is passed on to the end customer , it forms part of your sales whether a mark-up is added or not . There is a way for you to buy materials and not include them on your VAT return – disbursements – but this is quite complicated , no markup is allowed , and you have to precisely follow the rules . So , we won ’ t cover it here .
Professional advice VAT is complicated , particularly for the trade industry and there are some aspects like annual VAT reporting which haven ’ t even been mentioned .
I am not an accountant so I have no axe to grind . But really , consulting an accountant usually saves much more than it costs . It ’ s definitely worth doing this at least once to set you off on the right track .
About the author Benjamin Dyer is CEO and co-founder of Powered Now . Powered Now ’ s mobile app aims to take the pain out of paperwork for individual installers and small companies , as well as other trade businesses .
www . powerednow . com
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