If your annual VAT-inclusive income is below £150,000 you can adopt the flat rate VAT scheme (FRS) whereby your VAT returns are calculated using a simple percentage of the gross income. You cannot, however, claim VAT on expenses, unless on capital expenditure exceeding £2,000.
The aim of the scheme is to simplify the administration and save time although you will still need to charge VAT, raise sales invoices as normal.
You can (or would want to) switch to flat rate VAT if your annual VAT liability would be lower using the FRS but must do so via a form to HMRC.
If your turnover is less than £1.35m you can file one VAT return each year. You will make nine payments “on account” of the annual VAT bill and then a final balancing payment two months after the VAT period. Some clients prefer the fixed monthly amount to pay, although you need to be aware that each instalment is enough so as to avoid large balancing payments.
You can also adopt the flat rate scheme with the annual accounting scheme together.
Where you pay mileage claims to your employees you can reclaim VAT on a small proportion. Out of the 45p per mile paid (up to 10,000 business miles) around 15p to 18p, dependent on the car, will deemed to be fuel of which VAT is included. The VAT is therefore 2.5p or 3p multiplied by the number of miles.
These claims are often relatively small – and therefore not always thought about – but over a year could easily be a few hundred pounds. If this has been overlooked – and you can go back four years – then a claim could be sizeable by adjustment to the next VAT return.
Many businesses do not claim VAT on the entertainment of staff under the incorrect assumption that VAT on entertaining isn’t allowable. Where parties and other events are for employees and non-employees then the VAT can be claimed on the proportion relating to staff. You will need to apportion the expenditure between employees and non-employees.
As claims for input VAT can go back four years you may want to revisit the VAT on any expenditure.
The easiest thing to be picked up on a VAT inspection is a business not paying scale charges when due where private fuel is provided. The charge is based on the CO2 emissions on the car.
However, it may save money to not claim VAT at all on fuel as the scale charge will outweigh this. For example, a normal family car with CO2 emissions of 160g/km, say, would lead to VAT payable of £245 a year. This equates to fuel cost of £1,470. If the private miles are not significant, then you might want to refrain from claiming VAT on fuel if this is less than £1,470 a year.
Alternatively, where a husband and wife run two cars in the business, you might restrict claiming on VAT on fuel to just one car and therefore only accounting for scale charges on that one car.