Let’s start with the very basics: VAT is a tax on goods and services that is charged and reclaimed at each stage of the production and distribution cycle. For most items, VAT is charged at 20%, and businesses are required to register for VAT once their turnover exceeds £83,000.
Once registered, you will charge VAT on virtually everything: whatever items you sell or lease, business assets that you dispose of, commissions you charge, items sold to staff or used for personal reasons, and even some “chargeable gains” such as part-exchanges and certain categories of gift.
At the same time, you can reclaim any VAT you have paid for business-related goods or services, unless you register for the “flat-rate” scheme. VAT is usually payable quarterly, with financial penalties for missing more than one deadline in a rolling 12-month period.
The flat rate scheme
Typically, your company will pay all the VAT it charges to HMRC and reclaim all the VAT it pays. However, if you register for the flat rate scheme then you forward the VAT you charge at a reduced rate, which will depend on the sector in which your business operates.
As a quid pro quo, you are unable to reclaim any VAT you pay, except for capital purchases (or combinations of purchases, provided they are included on the same invoice) of more than £2000.
To join the scheme, you will need a VAT-exclusive turnover of less than £150,000 and you will need to spend more than 2% of your gross turnover on VAT-related items, excluding capital purchases, vehicle costs and food and drink for employees.
What if I can’t pay my VAT bill?
The first thing to do is call the Business Payment Support Service at HMRC and alert them of the problem. (Alternatively, if you’re already in arrears and have received a letter threatening legal action, you should deal directly with the VAT office that wrote to you.)
Once HMRC are aware of a cash flow issue, they will examine the situation and decide whether you are unable or unwilling to pay. An example of the latter would be citing a cash flow problem when you have funds earmarked for something else: this is not a legitimate reason to defer your VAT bill.
Typically, if HMRC conclude that your financial distress is genuine, they will allow you to pay off your arrears on a monthly basis, up to a maximum of a year. If you fail to keep up with the Time to Pay agreement, you should expect an immediate demand with added interest, which can quickly lead to legal action.
Similarly, if this isn’t the first time you’ve got into difficulties you may get a less sympathetic reaction, particularly if you’ve already defaulted on a Time to Pay agreement.
Don’t forget to talk to Cashsolv
Cashsolv are the specialists in small business finance, and if you’re faced with a VAT bill you can’t pay, we can have the funds in your account in under 24 hours via an emergency loan.