VAT & PAYE​​
Depending on the circumstances, you or your company may need to register for VAT and PAYE.

VAT (Value Added Tax)

  VAT is a tax that is levied on the sale of goods and services by UK business, it doesn’t matter if you are setup as a sole trader (self-employed) or a limited company, the same rules apply for VAT. A business must register for VAT once their sales over the last 12 months exceed the VAT threshold, which is currently £83,000 or otherwise you can either make a voluntary registration or remain unregistered for VAT.
 
Once registered, you must then add VAT onto your sales, unless your client is based outside the EC, in which case the sale is outside the scope of VAT. For clients based inside the EC, the rules then revert to the place of supply, this means if the end client is a person then VAT is added, if they are a business and VAT registered in their own country then the reverse charge rules apply and no VAT is added, (see below). This is something that may change once the UK leaves the EU, however there is currently no guidance on this.
 
VAT is therefore collected on behalf of HMRC by calculating the amount of VAT charged on vatable sales during a set period of time, usually every three months and then offset against VAT paid during the same period, the net amount is then either paid over to HMRC or refunded to the business (if VAT paid is more than VAT charged during the period).
 
Vat is either standard rate (currently 20%), zero rate (0%) or exempt from VAT (no VAT is chargeable). The zero rate applies to most basic food stuffs, water and sewage services, books and newspapers, transport services, such as business, trains and air travel and children’s clothing.
 
Exempt supplies are outside VAT, so if you only make exempt supplies you cannot register for VAT and therefore cannot recover any VAT on costs attributable to making those exempt supplies. Examples of exempt supplies are sales of residential property, rental income, insurance, education, health, betting, postal services, professional subscriptions and some fund raising and cultural activities
  

VAT Schemes

  
There are various VAT schemes which may be beneficial to your business depending on your circumstances.
 
STANDARD VAT SCHEME
 
Under the standard VAT scheme, you will charge VAT on your sales (unless they are outside the scope) and reclaim VAT back from your costs and pay over or be refunded the net. VAT returns are usually filed each quarter but you can opt for an annual VAT return. This scheme will suit most businesses whereby they are charged VAT by their suppliers.
 
Note that as you get the VAT back from HMRC, the net (ex VAT) cost which is then tax deductible for corporation tax.
 
The main draw back from using this scheme is the administrative burden of ensuring you keep VAT receipts. 
 
FLAT RATE VAT SCHEME
 
If your business qualifies to join the Flat Rate Vat scheme, then this offers a simpler way of dealing with VAT in that you don't need to account for each VAT transaction but rather pay VAT over to HMRC based on your VAT Turnover for the period. While you cannot reclaim VAT back from your purchases and costs (unless a capital item costing £2,000 (inc VAT) or more) you do not pay over all of the VAT you have charged, hence the business keeps a small percentage. Until recently this was fairly generous, however from 1st April 2017, the government has in effect removed this benefit for what is classed as a "limited cost trader".
 
According to the HMRC technical note, a Limited Cost Trader will be defined as one whose VAT inclusive expenditure on goods is either
 
1) less than 2% of their VAT inclusive turnover in a prescribed accounting period
2) greater than 2% of their VAT inclusive turnover but less than £1000 per annum if the prescribed accounting period is one year.
 
In order to prevent businesses including normal purchases to increase their costs above the 2% threshold, the goods must be used exclusively for the purpose of the business, this however excludes the following items:
 
1) Capital Expenditure such as IT Equipment, mobile phones etc.
2) Office Stationary
3) IT Software (unless purchased and provided on a physical storage disk)
4) Food and drink for consumption by the business or its employees
5) Vehicles, vehicle parts, fuel
6) Accounting Fees

If you are therefore classed as a limited cost trader then flat rate percentage is set at 16.5%, this means you will pay over almost all of the VAT you charge on your sales.

If you are not classed as a limited cost trader the you need to use the flat rate percentage that corresponds to the industry that you operate in, this can be from 5% to 14.5%.

EXAMPLE

Assuming you are not a limited cost trader and your flat rate percentage is 10% and you invoice £1,000+VAT. The amount of VAT you would pay over to HMRC is calculated as follows:

                      £1,000+VAT = £1,200 x 10% = £120.00

This means you have charged £200 in VAT but will only pay over £120 to HMRC, the balance of £80 is retained by the business and becomes part of the taxable turnover for the company.

If however you were classed as limited cost trader, then using the same above example, the VAT due to HMRC will be:

                    £1,000+VAT = £1,200 x 16.5% = £198.00
 
In this example, you would pay over £198.00 to HMRC, keeping just £2 for the business.
 
OTHER VAT SCHEMES
 
There are various other schemes depending which can be applicable depending on the business and how it operates.
  

Contact us now to discuss if you need to register for VAT

PAYE (Pay As You Earn)

  
A company would usually need to register for PAYE (pay as you earn) as an employer when you start to employ staff or use subcontractors for construction work.
 
You must register before the first payday and it can take up to 2 weeks, however you cannot register more than 2 months before starting to pay people.
 
You must also register if you are employing yourself, this is typical for personal services companies (professionals using a limited company to charge for their services often via contracts), so in this case you would be the only salaried director of the company.
 
Once registered you will receive a unique PAYE Reference which is used to report your payroll information to HMRC usually on a weekly or monthly basis. Once the PAYE registration is active, you must send "Real Time Information" (RTI) reports to HMRC each time you pay your employees.
 
Any payroll deductions, such as income tax, national insurance and student loan repayments must then be paid over to HMRC within a set time frame. It is essential that your PAYE scheme is administrated correct and any errors or omissions are dealt with quickly, if not HMRC can issue fines.
 
Some benefits in kind can also be put through a payroll, for example if you provide private medical insurance or other taxable benefits.
 
In addition to tax and national insurance, attachment orders are placed on employees, this is often for non-payment of council tax or other unpaid debts such as child maintenance payments.
 
Most employers will also need to setup a workplace pension, this is known as automatic enrolment and is becoming a legal requirement of most employers, again failure to set this up correctly could result in fines from the Pensions Regulator.
 
​Finally, in addition to the above, if you have an employee that is off sick or takes leave to have a baby, then you may need to arrange Statutory Sick Pay (SSP) or Statutory Maternity Pay (SMP).
 
Running a payroll may seem simple but there are a lot of factors than if not correctly administrated could cause issues with HMRC, we would therefore always recommend leaving this to a professional accountant.
  
Contact us so we can assist you with setting up PAYE or VAT