Magda Guzy Business Services Director

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Magda Guzy

Business Services Director

Magda qualified as an ACCA with a top fifteen accountancy firm in London. She joined Wilson Wright in 2012 as a Management Accountant, then moved to be Head of Business Services in 2015 and was promoted to Business Services Director in 2022.

Magda loves working with start-ups and established businesses. Her expertise is Management Accounting, Budgeting, Forecasting, VAT and Brexit VAT compliance and Apps cloud solutions. She helps clients to set up the most effective and cost-efficient accounting systems and ensuring the data is properly captured and proper controls are in place. She also runs ad hoc projects to review processes and suggests improvements.

Magda has  experience in cloud accounting and Apps/Add-on solutions which are available on the market. She works with clients from a variety of industries, including media and entertainment, manufacturing, property investment companies, retail and e-markets and many more.

In the spare time she loves running and spending time with her family.

4 Nov 2022

How does VAT work?

If a business reaches a taxable turnover of more than £85,000 in the previous 12 months it must register for VAT. Below that threshold, businesses have a choice as to whether to register on a voluntary basis.

Deciding to voluntarily register for VAT while below the threshold, could create a more professional image for the company and the ability to reclaim VAT on qualifying expenditure.

Companies generally end up having to raise prices to reflect VAT if their customers are not business customers, (although any VAT-registered customers can normally reclaim this element) and must file VAT returns on a quarterly basis (or monthly if you choose).

Knowing whether to voluntarily register for VAT is not a simple matter and should only be undertaken with the advice of an accountant or financial adviser.

VAT is chargeable at a rate of 20%, although select items have lower rates of 5% or 0%. Normally, businesses charge VAT on goods and services and reclaim it on expenses.

HMRC offers numerous VAT accounting schemes and selecting the appropriate scheme will depend on the nature of the business. 

The standard (accrual) VAT accounting scheme

Most businesses opt for this scheme. Under this scheme, companies are required to keep a thorough record of purchases and sales and submit a quarterly VAT return to HMRC, with the deadline for the submission and VAT due to be paid one month and seven days after the end of the quarter.

Under the accrual scheme, the VAT liability is calculated based on the dates of the paperwork (invoices and receipts), rather than the actual dates of cash in and cash out. This may cause cashflow problems if customers are slow to pay, which is where the VAT cash accounting scheme may prove useful however, there are some eligibility criteria to meet.

VAT annual accounting scheme

The annual VAT accounting scheme is good for businesses that prioritise keeping paperwork to a minimum. It only requires a business to file a return once a year instead of quarterly.

However, it does require companies to make monthly or quarterly interim payments based on an estimate of the amount due. This is then corrected to an accurate figure with either a top-up payment or refund at the end of the year.

Only businesses with a turnover of less than £1.35 million are eligible for this annual scheme.

VAT cash accounting scheme

Another option available to businesses with a turnover of less than £1.35 million in the next 12 months is the VAT cash accounting scheme. A business can join this scheme if it is up to date with its VAT returns and has not committed a VAT offence in the past 12 months.

This can be useful if customers take a long time to pay invoices, because instead of the VAT liability being calculated based on the date of the invoices issued, it is based on the date and value of payments received.

However, by the same measure, businesses can only reclaim VAT based on actual cash spent, not the date on the paperwork associated with a purchase. So, if the company uses a lot of credit, this scheme may be a cashflow disadvantage.

VAT flat rate scheme

The VAT flat rate scheme could be an excellent option for certain smaller businesses.

Instead of passing on the VAT collected from customers (less the VAT the business is reclaiming) to HMRC, the business will pay a fixed rate. This is determined by the industry sector and typically ranges from between 14.5% for professions like accountancy and law to just 4% for food retailers.

Companies also receive a 1% discount in their first year as a VAT-registered business. The trade-off is that it is not possible to reclaim input VAT on most expenditure.

While there’s an underlying simplicity to the concept, there are a few rules that add some complexity.

Firstly, the flat rate scheme is only available to businesses with a turnover (in the next year) of £150,000 or less, which will rule it out for a lot of VAT-registered businesses. There are other potential obstacles to joining; for example, if the business is “closely associated with another business” or it has committed a VAT offence in the last 12 months.

Secondly, if the company is classed as a ‘limited cost’ business, the percentage paid to HMRC rockets to 16.5%, which may prove poor value compared to some of the lower rates. A limited cost business is one whose goods cost less than either 2% of turnover or £1,000 a year.

Unfortunately, many vatable costs that a small business might incur cannot be put towards the £1,000 threshold, including rent, phone bills and vehicle costs.

VAT retail schemes

There are three specialist schemes available for retailers that are designed to make it less burdensome to calculate the VAT liability. With all three, businesses calculate the amount they owe just once, when completing the VAT return.

Depending on the type of retail activities, companies can choose from the point-of-sale scheme, where VAT is identified and recorded at the time of sale; the apportionment scheme, which is best for companies that buy goods for resale; and the direct calculation scheme, which is appropriate when sales are made at different rates of VAT.

Each of these can be used in conjunction with the annual accounting scheme or cash accounting scheme – but not the flat rate scheme. If the turnover (excluding VAT) ever grows to £130 million when using a VAT retail scheme, businesses will have to agree a bespoke retail scheme with HMRC.

VAT margin scheme

The VAT margin scheme can be a good choice for companies that trade items that do not have VAT on the purchase. This could be second-hand goods, works of art, antiques, and collectors’ items.

Businesses calculate the VAT based upon the value added between purchase and sale and prescribes a rate of 16.67% on this amount.

As well as items on which you were charged VAT being excluded, so also are precious metals, investment gold and precious stones.

Making tax digital (MTD)

It would be remiss not to mention that, as of April 2022, all VAT returns must be filed in compliance with HMRC’s Making Tax Digital (MTD) initiative. The simplest way of doing this is by using accounting software like Xero.

While the change to a new way of doing things digitally may seem daunting, it should make things simpler and more efficient in the long run. If you would like to discuss VAT accounting schemes and which one would be most appropriate for your businesses, please let us know.