(INTRO – Topic Slide – Slide 1)

Hi Everyone, I am Ola Fashipe co-founder of Grosvenor.solutions.

In this short video, we will be covering Value Added Tax, VAT for short.  Now before delving any further, it is important to mention this will be a high-level overview, intended to help you understand the essential concepts and principles that can impact individuals and businesses registered for VAT

(Slide 2 – What is VAT)

While it will offer valuable insights into VAT, it is important to note that VAT can be complex and nuanced, with rules and requirements that vary depending on business circumstances. This is why I always advise that you seek professional financial advice.

it is important to mention I will be using the VAT technical definition of the word business.  For VAT purposes, the term business is not limited to businesses in the traditional sense.  It refers to anyone – whether an individual, company, or organization – that supplies goods and services that fall within the scope of VAT

Let’s start with definitions, what is Value Added Tax or VAT for short?

Essentially, it’s a tax charged on most goods and services supplied by businesses that are registered for VAT in the UK. 

Businesses are responsible for collecting VAT on sales, the VAT on sales is called ‘output tax,’ and they offset this against the VAT they pay on their purchases, the VAT on purchases is called ‘input tax.  The difference between output and input tax is either paid to or reclaimed from HMRC, the tax authority.  The simplistic example you see screen of a wooden table sold to an end-consumer for £240 will help illustrate how VAT works.  The main raw material, wood, is initially sold , by the producer to the manufacturer of the table for £60.  This will include VAT of £10.  Where prices include VAT at 20% simply divide the price by 6 to determine the VAT element. 

Th manufacturer in turn uses the wood to provide the table, and in turn sells the table to a distributor for £90, the distributor sells it for £120 to a retailer, who in turn sell it for £240 to the end-consumer.  All the sale prices had 20% VAT on them.

As we can see the end customer pays £240, this includes £40 VAT.  However, the £40 is collected at each stage of the cycle.

One thing to bear in mind is that You can only reclaim input VAT where the expense is related to the production of goods and services within the scope of VAT.  The manufacturer sold the table to the distributor for £90, the VAT on this was £15.  However, they paid £60 for the wood which included VAT of 10. So they’ve ended up paying only £5 VAT (by offsetting their input VAT of £10 against their output VAT of £15)

(Slide 3 – Registering for VAT)

Registration for VAT is either mandatory or voluntary.  As mentioned earlier, a business must be registered to charge VAT on sales or reclaim VAT on purchases. 

“a business” if its  taxable turnover exceeds £90k over a 12-month period, or is expected to do so in the next 30 days.  This is the Law, and this is mandatory registration.

A business may also choose to register for VAT where there taxable turnover is below the £90,000 VAT threshold; this is voluntary registration. 

So why would a business choose to register for VAT if it doesn’t need to do so (given the administrative and financial costs of VAT).  Well, in some scenarios, it can be beneficial for businesses that do this.  For example a start-up with significant set-up costs (and insignificant sales) may choose to register so it can claim the VAT on its purchases.  A business may also choose to register to attract large business customers who have a policy of only trading with VAT registered suppliers, and quite a number of large organisations will only trade with VAT registered businesses!.   

(Slide 4 – VAT Rates)

Goods and services within the scope of VAT will fall into one of 3 rates.

Most goods and services fall within the standard rate, which is 20%. 

There is a reduced rate of 5% which typically applies to goods and services deemed by the government to have societal or environmental benefits

Thirdly, there is a zero rate which applies mainly to essential goods and services.

The VAT threshold of £90,000 applies to the value of goods and services supplied that fall under the standard, reduced, and zero VAT rates. 

There are some goods or services that are not within the scope of VAT.  These are exempt items.  The rules of VAT do not apply to Exempt items.  You cannot charge VAT on exempt goods and service even if you are registered for VAT.  You also cannot reclaim any VAT on purchases of goods and services used in the production of the exempt items. 

(Slide 5 – VAT Schemes)

“Managing VAT can be a significant challenge for businesses, especially for small businesses where administrative tasks and cash flow concerns are critical.

To address this, there are several VAT schemes specifically designed to reduce the burden of VAT. 

The standard accounting scheme is the default scheme for VAT.  Under this scheme the amount of VAT is determined by the value of invoices issued on sales regardless of when payment is made and the value of invoices received on purchases during the period (again regardless of payment status).  Under this scheme a business could be paying VAT on invoices that are pending payment from customers.  This is not good for cash flow management

With the cash accounting scheme VAT is based on cash inflows and outflows, rather than invoice flows, so this can be better for cash flow management.

We also have the flat rate, annual accounting, retail and margin schemes.

The alternative schemes do have several restrictions and conditions for eligibility which I have not covered.  Careful analysis needs to be undertaken when deciding on the best scheme for you. 

Choosing the right VAT scheme is crucial for minimizing your VAT liability and saving money. It’s wise to regularly assess whether your current scheme remains the best fit, especially if your business experiences significant changes.

(Slide 6 – Imports and Exports)

Let’s take a quick look at International VAT considerations.  In general exports are zero-rated, this is to promote UK exports though you should check if VAT (or its equivalent) is levied in the local market being exported to.

Imports on the other hand incur VAT at the time the goods clear customs, though the timing can be delayed to when the next VAT return is submitted using Postponed VAT accounting

(Slide 7 – Best Practices)

Now let’s look at a few VAT best practices that can help ensure compliance with VAT rules, correctness of VAT returns and efficiency to ultimately reduce the burden of VAT. 

Most of the best practices are self-explanatory so we’ll just go through a few.  Feel free to contact me if you do require clarification on any of them.  I provide our email and phone numbers at the end of the presentation. 

You must understand VAT rules and ensure you keep up to date with any changes.   Without knowing the rules you cannot comply with them.

You must have accurate and complete financial records.  You want to also optimise input VAT, ie, claim as much input VAT as possible as this minimizes the VAT you pay and/or maximises the VAT you reclaim.  This depends to some extent on have complete accurate records

 We’ve covered using VAT schemes and choosing the scheme that is best for you, and as you can see on screen there are other best practices I do not have the time to go through. 

(Slide 8 – Technological Benefits)

In today’s complex VAT landscape, technology is essential, whether businesses manage VAT themselves or rely on an accountant. For businesses handling their own VAT, technology provides crucial support for navigating the UK’s stringent rules. It streamlines processes like accurate record-keeping, real-time tax calculations, and automated reporting, ensuring compliance and minimizing the risk of costly penalties. Advanced VAT technology can also identify VAT recovery opportunities, flagging eligible expenses and maximizing reclaimable VAT. Furthermore, it reduces human error, saves time on manual tasks, and offers valuable insights through analytics to optimize a business’s VAT position.

Equally, when VAT is managed by an accountant, technology is vital for enhancing effectiveness and efficiency. Accountants leveraging advanced VAT software can provide more accurate and timely services to their clients. Streamlined processes, automated reporting, and access to real-time data allow accountants to identify potential issues, optimize VAT strategies, and ultimately deliver greater value. In a landscape where both compliance and efficiency are paramount, the right technology empowers both businesses and their accountants to not only meet obligations but also maximize profitability and minimize risk.