VAT advice for business

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1 VAT advice for business VAT top tips Helping to make VAT a piece of cake Thinking of growing your business and trading abroad? We look at the impact it may have on your VAT

2 VAT advice for business We understand that legislation is one of the things which keeps business owners awake at night and for many that legislation is VAT. VAT is a complicated tax that can have a big impact on your business if you get it wrong. That s why we re looking at how to take the stress out of VAT so you can concentrate on growing your business - here and abroad.

3 VAT: Strange but true First levied in the UK on April Fools Day 1973, VAT is now the government s third largest source of revenue after income tax and national insurance. Now in its 40th year, what started out as a simple, easy to collect tax - imposed on most goods and services - has become increasingly complex, with exemptions for everything from children s clothes to Jaffa Cakes... Every man for himself It turns out that not all gingerbread men are born equal. Gingerbread men with only two chocolate dots for eyes are zero-rated, but adding any further chocolate decoration turns him into a luxury item at 20% VAT! Is it a cake or a biscuit? According to HMRC, snowballs (marshmallow covered in chocolate) are classed as confectionary and therefore subject to VAT, but their biscuit-based cousins, the tea cake, is VAT exempt - all because of that crunchy base. And perhaps the most infamous VAT product, the Jaffa Cake was at the centre of a challenge over its status. Despite its name, Jaffa Cakes are usually found alongside biscuits. But when it comes to VAT, biscuits attract the tax while cakes - as a staple item - do not. Jaffa Cake manufacturer McVitie s went to court to establish its right to avoid charging VAT on its product and won. Its clinching argument was that when biscuits go stale they go softer. But when cakes go stale they go harder. What happened to the Jaffa Cakes? They went hard! The potatoness of Pringles McVitie s may have won its case but Procter & Gamble, the manufacturers of Pringles were not so fortunate. Although the High Court initially ruled in P&G s favour concluding that the snack was more akin to a cake or bread, so therefore zero rated for VAT they eventually lost their battle. The product was - despite being only 50% potato - finally deemed a potato crisp by the courts. As a result P&G faced a gigantic tax bill in the region of 100m, but more importantly we now know Pringles are definitely crisps. Pasty-gate Chancellor George Osborne seriously underestimated the public s love of pasties when he announced plans to levy standard rate VAT on hot, freshly-baked takeaway. A U-turn soon followed in which the proposal was amended to allow food that was hot but cooling to continue to be zero-rated. Hence, pasties, pies and other hot takeaway food are zero-rated unless kept warm in the shop - for example, under a hot plate or in a cabinet, in which case it is standard-rated. 3

4 Avoiding common VAT mistakes We know that VAT can cause problems from time to time, and if you re trying to run a business, you certainly don t want to spend your time trying to understand every single detail. Fortunately, you don t have to. You can make handling VAT easier - and avoid most VAT mistakes - if you make sure you ve got the right systems in place. Common VAT problems Recognising the areas of VAT that can catch other businesses out is a good way to avoid them yourself. Here are some key issues to be aware of: Missing details Chasing details can lead to late VAT returns and result in fines and more frequent VAT inspections. Make sure you collect all the details you need and record them straight away Accuracy of dates You ll need to know the date of supply for each invoice - which isn t always the date of sale. Changing to HMRC s Cash Accounting Scheme could make record keeping easier VAT applied to personal supplies There are special rules for supplies you use personally or provide to your employees, including things like company cars, fuel and also business entertainment VAT applied when trading internationally There are different VAT rules that need to be applied depending on whether you are trading with businesses inside the EU or elsewhere Out of date records You can avoid high accountancy fees by keeping accurate and organised records making it quicker and easier to submit your VAT returns Incomplete VAT invoices You must ensure you issue proper VAT invoices to your customers. You must also keep VAT invoices for all your purchases Reclaiming VAT If the goods or services you supply are exempt from VAT, you cannot usually reclaim the VAT you pay on purchases related to them How to avoid the problems It s not realistic to expect VAT to be entirely straightforward but there are a few things you can do to make submitting VAT as simple as possible. Choose a VAT scheme: Check whether any of HMRC s accounting schemes will make your life easier and suit your business better. There are several schemes that help simplify VAT if your turnover is less than 1.35 million. Set up a VAT account: Take a disciplined approach to keeping on top of VAT. It s a good idea to set aside a regular time each week - or each day - to update your accounting records. Assign a person to manage VAT: Whether you plan to manage VAT yourself or delegate the work, make it clear who is responsible to avoid confusion and ensure consistency in your record keeping. Choose the right software: Make it easier to manage by choosing accounting software that automates VAT invoicing and filing online VAT returns straight to HMRC. VAT can be complicated to understand but by being aware of the areas that can cause problems and following simple steps to avoid them, you can save yourself time and avoid the cost of high accountancy fees and fines. 4

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6 6 How to handle VAT in international trade International trade can be a great way to improve your business performance. Fast-growing overseas economies like China - whose economy grew by 7.8% in 2012, and Brazil - the UK s most important trading partner in South America, and the seventh largest economy in the world, both provide exciting opportunities to break into new markets.

7 Importing can reduce your supply costs or allow you to source products that you cannot find in the UK. International trade is big business. UK businesses make exports totalling almost 40 billion a month, and total imports are even higher. Even so, only around a quarter of British businesses export. We know that many businesses worry about the red tape associated with international trade. But there s no reason to let that hold you back. Putting the right systems in place can help you exploit the opportunities that international trade offers and ensure you comply with VAT requirements and make you more attractive to overseas customers and suppliers you want to work with. Selling internationally - exports and despatches The way you deal with VAT in international trade depends on who your customers and suppliers are, and whether they are within the EU or in another country. Sales to overseas customers can be treated in three different ways: For sales within the EU to individual consumers, or to businesses that aren t registered for VAT, you charge VAT in the usual way. For sales within the EU to VAT-registered businesses, you can usually zero-rate the sale. You need to keep a record of each customer s VAT number. Exports to customers outside the EU are usually zero-rated. You need to keep proof that the goods have been exported. As with UK sales, the value of your exports and any VAT charged on them is included in your VAT return. You ll also need to give HMRC some extra details on your sales to VAT-registered businesses in the EU. (We ve got accounting software that will handle these extra requirements automatically). Buying internationally - imports and acquisitions The way you deal with purchases from overseas suppliers also depends on whether they are within the EU: EU suppliers will normally zero-rate their sales to you if you provide your VAT number. Although you are liable for VAT at the usual UK rate, you can also reclaim that VAT in the same way as for other business purchases. For purchases from outside the EU, you pay VAT at the usual rate plus any additional import duty to clear the goods through customs. HMRC approved accounting software such as Sage 50 Accounts can produce the details needed in your VAT return, along with any extra information required by HMRC. Getting started... Of course, successful international trade is about more than dealing with VAT. There are many other things to consider including sourcing suppliers, securing finance and handling deliveries. When you re ready to start trading abroad we ve got accounting software that can help you in all aspects of overseas trading whether that s complying with the latest legislation, managing exchange rates or dealing with multiple currencies. 7