pub, MTD, VAT, accounting, book-keeping, advice for pubs, publicans,

Value Added Tax (VAT)

Valued Added Tax (VAT) is collected by HM Revenue and Customs and is a tax charged on most goods and services that VAT registered businesses provide in the UK. It is normally payable quarterly.

There are two types of registration:

Compulsory

A person or business who makes taxable supplies become liable to be registered for VAT if:

  • At the end of any month, the value of the taxable supplies in the period of one year has exceeded registration limit, currently £85,000 for 2019/20
  • At any time there are reasonable grounds for believing that the value of the taxable supplies in the next 30 days will exceed the limit
  • Where a business carried on by a taxable person is transferred as a going concern, the taxable supplies for the twelve months prior to the transfer exceeds £85,000

Generally the person or business must notify HM Revenue and Customs within 30 days of the end of the month in which the value of the taxable supplies first exceeded the limit.

Voluntary

In certain circumstances it is possible to register on a voluntary basis for VAT even though the value of taxable supplies may never exceed the limit. For example:

  • If you sell zero rated items and buy standard rated items you would receive a VAT refund from HMRC
  • If you have not yet sold anything or don’t sell anything during a VAT accounting period, you may still be able to claim VAT back on purchases.

Taxable Persons and Supplies

Taxable persons – It should always be remembered that for sole traders and partnerships, it is a person that is registered for VAT and not the business. If a person has two separate businesses with taxable supplies of £42,500 each then that person will need to be registered for VAT as the combined turnover amount exceeds the VAT threshold.

Taxable supplies – These are all supplies made by a business either to a third party or to the trader himself (goods for own use) which are not exempt supplies. Taxable supplies also included zero-rated supplies.

Tax Rates

There are four rates of VAT:

  • Standard rated -20%, has been reduced temporarily on food sales (and accommodation, if you provide letting rooms) to 5% until January 2021, in response to the Covid-19 pandemic. You should note it does not apply to sales of alcohol.
  • Reduced rated – 5% for certain supplies of fuel and power.
  • Zero rated – a taxable supply but the rate of tax is nil i.e. food, passenger transport (excluding hire cars, taxis and parking), young children’s clothing, books and newspapers.
  • Exempt – goods and services which VAT is not charged. i.e. insurance, finance and credit, subscriptions, postal services.

Making Tax Digital (MTD)

HMRC introduced this compulsory regime for all VAT registered businesses from April 6th, 2019.

How to sign up for MTD

Not surprisingly, this does not happen automatically and instead requires some active steps by businesses within its scope.

The following steps must be followed to sign up to MTD for VAT (NB HMRC are making regular updates to the MTD material on their website so some of these details may change):

  1. Navigate to the ‘Sign up for Making Tax Digital for VAT’ page on the HMRC website and click on the link titled ‘Sign up your business for Making Tax Digital for VAT’.
  2. You will then be asked to confirm you are using MTD compatible accounting software.
  3. Sign in using your Government Gateway ID and password. This is the same ID you use currently to submit VAT returns online. If the business doesn’t currently file online you will be prompted to add some additional information such as the VAT registration number, date of registration and business postcode.
  4. You will then be asked to answer a series of questions about the business. For incorporated businesses this will include the company registration number and Corporation Tax unique taxpayer reference number so it is worth having these to hand. 
  5. Businesses signing up during the pilot period are being asked to agree to receive emails instead of letters from HMRC, i.e. to consent to paperless communications. It is understood that HMRC are considering allowing an opt-out for this once MTD is mandatory but not for businesses that pay by direct debit who will always need to provide an email address. Before starting the sign-up process it is advisable to consider which email address would be most appropriate to use. A functional mailbox that will remain in existence as team members come and go may be preferable, particularly for larger organisations. Where an email address is input an automatic message will be sent to it from HMRC asking for it to be confirmed. 
  6. The final step that is required in the pilot phase is to read and accept HMRC’s terms of participation. It is currently unclear whether such terms will remain once MTD is mandatory.

What happens once you have signed up for MTD?

The act of signing up for MTD effectively closes off the current VAT return submission area of the HMRC portal for the business. All the details held by HMRC for the business will move to the new MTD area and if the business tries to submit a VAT return using the old process, ignoring any warning messages that appear, it is understood the return will submit but will effectively be ‘lost’ in HMRC’s systems as they will not be able to match the return to the business. It is essential to submit the final non-MTD return before signing up for MTD.

Output VAT

Any VAT charged by the business at standard rate is known as output VAT and the total charged in the VAT quarter is payable to Customs and Excise.

Input VAT

Input VAT is the VAT that you are charged on your business purchases and expenses, and is reclaimable. The total input VAT suffered in the quarter is deducted from the output VAT charged or collected and the difference is either the amount of VAT due to HM Revenue and Customs or the amount repayable by HM Revenue and Customs

The majority of input VAT is recoverable but there are special rules for:

  • Cars
  • Petrol supplied for private usage
  • Business entertaining
  • Goods sold under a VAT second hand scheme

Zero Rated Supplies

Zero rated supplies are for good which are included in the scope for VAT but has a VAT rate of 0%. Zero rated goods and supplies include the following:

  • Basic food provisions
  • Books and newspapers
  • Transport services i.e. buses, trains and aircraft
  • New residential accommodation
  • Children’s clothing

Exempt Supplies

Exempt supplies are for items which are not included in the scope for VAT. If an item is exempt you cannot reclaim the VAT on your purchases if you are VAT registered. If you provide exempt supplies to customers you can’t register for VAT and cannot charge or reclaim VAT on your goods or services. If you make both taxable and exempt supplies you can register for VAT but you will not be able to recover all of the VAT on your costs.

Special Events

It is not always possible to calculate each quarter’s VAT liability by merely deducting input VAT incurred against sales output VAT and professional advice needs to be taken in the following situations:

  • Partial exemption
  • Retail schemes
  • Land and property
  • Cash accounting
  • Self supplies
  • Second hand scheme for motor cars, used boats, antiques, horses and ponies etc
  • Flat rate scheme

Online VAT returns and paying electronically

HM Revenue and Customs has phased out paper VAT returns. From April 2012 all businesses have to submit VAT returns online and pay any VAT due electronically.

The online VAT return is very similar to the old paper version and there has been no change to the rules on how you complete your return or how to calculate VAT. You also do not have to change your existing record keeping system – you can still keep manual records on paper if you prefer, it’s only the official return that has to be submitted electronically.

To register for VAT online you need to go to www.hmrc.gov.uk, click on register under the ‘do it online’ heading. You will first need to register and enrol in order to submit a VAT return online. Therefore you need to make sure you register well in advance before the VAT Return is due to be filed.

Once you have registered you will be able to submit VAT returns online, together with setting up your direct debit payment if applicable. Please note that if you submit your VAT online you have an additional 7 days to submit your VAT returns and an extension to the payment deadline. Normally payment is collected by direct debit on the 12 of the month following the end of the VAT return period filing date. For example, a VAT return for the quarter ended 30 September, would have originally had to be filed by post by 31 October, but if submitted online does not need to be submitted until 7 November and payment will not be collected by direct debit until around 12 November, therefore giving you more time to pay, which in turn eases cash flow.

Flat Rate Scheme

Using the Flat rate scheme you do not have to calculate the VAT on each and every transaction. Your turnover must not be more than £150,000 when you apply for the scheme, and as soon as you reach £230,000 turnover you must leave the scheme. You simply pay a flat rate percentage of your gross turnover as VAT. The percentage is less than the standard VAT rate because it takes into account that you cannot reclaim VAT on any of your business purchases. There is a range of flat rate percentages for different types of trade sectors. To qualify for the scheme your taxable turnover must be less than £150,000, thus, for many pubs this is not an option.

Invoice Accounting

Is when you declare VAT or reclaim VAT on the date of the actual sales or purchase invoice. This is the traditional method used by many businesses, and in all probability will be the scheme your pub will use.

Cash Accounting

Using the cash accounting scheme you do not need to declare VAT or reclaim VAT on invoices until they are paid. To qualify for the scheme your taxable turnover must be less than £1.35 million. You can continue to use a cash accounting scheme until your VAT taxable turnover exceeds £1.6 million.

IMPORTANT CHANGE THAT MAY AFFECT YOUR PUB

If you provide accommodation for your staff or you offer rooms to let to customers then this article from the Publican’s Morning Advertiser is worth a read.

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