Value Added Tax (VAT) is a critical aspect of doing business in the retail sector.
As a VAT-registered business, charging the appropriate VAT rate on all taxable sales is mandatory.
This collected VAT, referred to as ‘output tax,’ is paid by the customers to the business, but must be accurately reported and remitted to HMRC by the business.
Conversely, VAT paid on business-related purchases can be reclaimed, known as ‘input tax.’
Read on to learn more about how VAT works and how to manage it.
VAT registration: the first step
Retailers must register for VAT if their taxable turnover exceeds the current VAT threshold of £85,000 over 12 months, or if they expect to exceed this threshold in the next 30 days.
Voluntary VAT registration can benefit businesses, particularly those with significant VAT-deductible expenses.
Registered businesses can reclaim VAT on their purchases even if their turnover is below the threshold. This can help retailers unlock substantial cost savings, especially for those that incur VAT charges on raw materials, inventory or capital equipment.
Once registered via HMRC’s online service, you’ll receive a VAT number, which should be displayed on all invoices.
Accounting for VAT on sales and purchases
Retailers who are VAT-registered are required to include VAT in the prices of the goods and services they sell. The standard VAT rate is 20%, but some items have reduced VAT rates or are zero-rated.
Calculating and applying VAT accurately is crucial for correct pricing and compliance with tax regulations.
Here’s how to do it:
Recording VAT on purchases
Since businesses pay VAT to HMRC from sales, they can reclaim it from purchases.
VAT-registered retailers can reclaim VAT paid on business-related purchases. This process requires maintaining precise records of VAT invoices received from suppliers, detailing the amount of VAT paid.
Understanding VAT accounting Schemes
There are different methods of accounting for VAT, including flat-rate, cash and annual accounting schemes. It’s essential to weigh up which one will work best for your retail business.
Flat rate scheme
This simplified VAT scheme allows eligible businesses to pay VAT as a fixed percentage of their turnover. It’s particularly suited for businesses with less complex accounting and fewer VAT-deductible expenses.
However, this scheme might not be the most cost-effective for those who frequently reclaim VAT, as it limits the ability to reclaim VAT on purchases.
Cash accounting scheme
In the cash accounting scheme, VAT is paid only when customers receive payments and reclaimed after paying suppliers. This can benefit businesses that experience delays in receiving payments, helping with cashflow.
However, it may not be ideal for businesses that often reclaim more VAT than they pay since reclaims can only be made after supplier payments.
Annual accounting scheme
The annual accounting scheme allows businesses to file just one VAT return annually and spread their VAT payments yearly.
This can reduce your administrative burden and assist in cashflow management. However, it requires businesses to estimate their annual VAT liability, which is challenging if sales are unpredictable or growing.
Managing VAT compliance obligations
VAT-registered retailers are required to submit regular VAT returns, usually every quarter. As of April 2022, these businesses must also comply with Making Tax Digital (MTD) for VAT rules.
Under MTD for VAT, businesses need to keep their VAT records digitally and file their returns using HMRC-approved software.
If you’re new to VAT, you’ll be automatically signed up to MTD for VAT upon registration, unless your business is exempt.
It’s vital to ensure that your records and returns truly reflect the VAT collected from customers (output tax) and the VAT reclaimable on purchases (input tax).
The difference between these amounts is the amount of VAT you will owe to HMRC.
As tech-savvy accountants, we can offer guidance on how to navigate this new way of doing taxes.
Keeping accurate records
Effective VAT management requires maintaining good bookkeeping practices. Retailers must maintain detailed records of sales, purchases and VAT invoices for at least six years after the relevant reporting period.
These records should be readily available if HMRC requests to access them. Accurate and organised records are essential for VAT returns, but they can also provide you with a clear financial overview of the business.
Dealing with VAT investigations
HMRC conducts tax investigations to verify taxpayer compliance with regulations. During these enquiries, you should ensure you have all necessary documentation on hand, including VAT accounts, sales and purchase records, and VAT invoices.
It’s also advisable to regularly review VAT records internally to ensure ongoing compliance.
Unique challenges for retailers
One of the primary challenges for retailers is managing products that attract different VAT rates.
The standard VAT rate in the UK is 20%, but certain goods and services are taxed at a reduced rate of 5% or even zero-rated. Retailers must apply the correct VAT rate to each product category, or face scrutiny from HMRC.
Navigating VAT can be more complex for retailers that trade internationally. If you have branches outside of the UK, you’ll also need to comply with the VAT rules in different countries. This includes knowing when to charge VAT and how to handle VAT recovery on imports.
In most cases, you do not need to charge VAT on goods you sell, send or transfer out of the UK. That means you can often zero-rate items when shipping overseas. However, different rules apply to Northern Ireland businesses shipping to EU countries.
Retailers must stay current with the latest VAT rates, maintain accurate and detailed records of all transactions and adhere to strict reporting requirements.
In many cases, it’s advised to partner with an accounting firm experienced in supporting retailers with their VAT obligations
As expert accountants for retailers, Venthams offers expertise in VAT management, ensuring businesses remain compliant with current regulations while optimising their financial performance.
Contact us today to find out how we can help you with your VAT compliance responsibilities.