Three Ways to make VAT easy for small
businesses
Cash Accounting
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If your taxable turnover (excluding VAT) will be £660,000 or less
during the coming year, you may be eligible to calculate your VAT payments
using the cash accounting VAT scheme.
The cash accounting scheme is especially useful for businesses who are
owed more, from customers, than they owe their suppliers.
Essentially you pay VAT only when your customers have paid you, not on
submission of a sales invoice.
This may improve cash flow and means you only pay over VAT that has
already been paid to you. BUT please be aware that you can only claim back
VAT on your purchases once you have paid your suppliers.
Annual Accounting
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How would you like to minimise the amount of time you spend completing
a quarterly VAT return? A solution may be found in the Annual Accounting
scheme which allows you to calculate your VAT once a year!
Practically you will need to estimate your VAT for the coming year and
pay in monthly (or longer) instalments. The balance will become due
with the Return, two months after the end of your accounting year.
A word of caution! If you do use Annual Accounting for VAT, we suggest
that you continue to maintain a monthly bookkeeping routine. If you leave
everything to the end of the year you will find the filing of your annual
return, two months after your year end, difficult to meet! Penalties,
surcharges and interest may be charged if you are late.
You can join this scheme if you meet the following conditions:
1. If your expected, taxable annual turnover is £660,000 or less, but
more than £150,000 and you have been registered for 12 months already.
2. If your annual taxable turnover is estimated to be under
£150,000.
Flat Rate Scheme
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If your projected, annual, taxable turnover (excluding VAT) is expected
to be less than £150,000, then you could consider the FLAT RATE SCHEME.
Time is saved with this scheme as record keeping is simple - you
calculate your total turnover (inclusive of VAT) and apply a flat rate
percentage (different rates apply depending on which business sector you
belong to). There is potential for a 1% reduction in the rate for the
first year of registration.
You can then be certain of what your liabilities will be, although you
will not be able to claim back VAT on purchases unless you buy a capital
item over £2,000. You must apply to be part of this scheme.
Combine the schemes
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You can also use a combination of the above schemes. In this way you
can maximise all the benefits:
- VAT due based on cash received
- One VAT return per annum
- Regular monthly payments to ease cash flow.
- Simplify calculation of VAT due by applying the Flat Rate
Percentage.
Call us for advice if you think you could benefit from any of the above
schemes - or all!
In business at the 5 April 1996 - and still going
strong?
When self assessment was introduced, way back in 1996, the commencing
provisions produced a strange result.
If your year end was set to be any month other than the 31 March or the
5 April, then a proportion of your profits "overlapping" the tax year end
were actually taxed twice. This created a relief called "overlap relief"
which you will be able to claim when you stop trading.
Two problems may arise!
1. If your profits now are much lower than they were in 1996-97,
or
2. If your profits now are much higher than they were in
1996-97.
Profits are now much higher
---------------------------
If your profits are now higher, when you stop trading the deduction for
overlap relief will have a less than proportionate affect on your final
years tax bill. The outcome may be a larger than expected payment due to
Her Majesty's Revenue and Customs.
Profits are now much lower
--------------------------
In this case the deduction of overlap relief from your final years
profits may turn your final assessment into a terminal loss. Looking good
as there is no tax to pay.
But what if you can't carry the losses back and use them to reduce tax
in earlier years?
In this case the notional double assessment of profits in the 1996-97
tax year will become a permanent double taxation of profits!
Possible solutions.
-------------------
We can help you plan your run down to cessation of trade and perhaps
organise a pre-cessation change of accounting date, which may mitigate the
effects of overlap relief on close down.
If a higher tax bill looks inevitable, we can help you plan for the
"rainy day" - to save in advance and have enough reserves to cover the
bill.
So if you are thinking of scaling down your business now that you
are getting older, or otherwise contemplating a cessation of trade, then
call us now. The best way to minimise any potential damage is to plan for
the most effective deployment of overlap relief and maximise any strategic
opportunities that you may still have. Once you have stopped trading
planning opportunities may be lost!
Incorporating your Business - Tax allowances for
plant and machinery
Possible tax advantage can be created if you are using the Holdover
Relief provisions when you incorporate your business. (Holdover relief is
used when your business assets are transferred partly for shares in the
new company but predominately as a credit to your loan account in the
company.)
If this applies then you can elect to sell plant and machinery to the
company for a nominal price. As this nominal price is likely to be much
lower than the tax written down value of the assets, this can give rise to
two significant advantages:
1. A cash flow saving as the resulting balancing allowance can be used
to reduce your final tax bill as an unincorporated business, and
2. As your marginal rate of tax as an individual is likely to be higher
than corporation tax rates, then you create a permanent saving in
tax.
