VAT considerations for new businesses
What you pay and what you can claim back
For companies, and sole traders for that matter, whose annual turnover exceeds a certain amount (currently £56,000, but this could change in the Budget), quarterly VAT returns must be completed and sent to HM Customs and Excise along with any payment due. The VAT forms are very simple – just a single page, in fact – and usually work in the company’s favour. This is because although you must pay VAT on any income generated, you can claim back VAT paid on some goods and services, such as office supplies, vehicle servicing, fuel and so on. So the extra accounting is definitely worth it and even companies whose turnover is less than the VAT limit can still register voluntarily.
Not all products and services attract the standard 17.5% VAT rate, so it’s worth contacting your local HMC&E office to request one of their introductory videos, which will explain the basics of VAT accounting. If that’s not enough, you can also enrol on a brief course, again run by HMC&E, which will go into greater detail.
Try to keep track of changes to tax regulations. This means listening to the entire Budget speech, not just the part about cigarettes, alcohol and petrol! Your accountant should do this for you, but it doesn’t hurt to know about VAT limits, changes in basic tax rates and changes to the company car regulations yourself.
Above all, tempting as it may seem, don’t ever attempt to ‘cook the books’. Penalties for tax evasion are high. It’s not worth the sleepless nights and feelings of guilt just to shave a few pounds off your tax bill. And there’s always the chance that you’ll be found out, especially if you are audited.
The percentage of companies audited each year by either the IR or Customs and Excise is quite small, but both organisations have effective ways of tracking suspicious returns. The auditing process is thorough and time-consuming, since all receipts and invoices must be checked against the returns and shown to the investigating accountant. Also, the Statute of Limitations is biased in the auditors’ favour, so you may have to dig out paperwork going back many years.
Because of this, you may want to take out auditing insurance with your accountant. The work involved during an audit is considerable – allow for three days at the very least – and could become very expensive if you pay your accountant by the hour.
Ultimately, you should remember that you’re expected to account for every single business-related penny spent; this includes invoices for trade magazines and newspapers, for example. Although there may be some discretionary leeway, you are expected to show each month’s transactions in sufficient detail that your profit and loss, income and expenditure – and therefore tax – can be clearly calculated.
Above all, tempting as it may seem, don’t ever attempt to ‘cook the books’.