Notes for the newly registered business – Part 2

Notes for the newly registered business

This is the second post in this series. Last time we looked at definitions. Now lets move on to accounting for VAT.

Accounting for VAT

How to get ready to do your VAT return

Preparing to do your VAT return is something that you should do regularly during each VAT period. This means that you need to enter your sales invoices in your books and records, and also keep track of all your expenses more than at the end of your VAT period! If you do this regularly, or have a bookkeeper who does it for you, it will make the process of doing your VAT return much simpler.

Sales

How you record these will depend on the type of business you are running. If you are running a retail business you will not generally issue invoices for every transaction. If you are running a business that sells mainly to other businesses, you will have to provide a VAT invoice for each sale so that your customers can recover the VAT you have charged them, if they are also VAT registered.

Matters can be a little more complicated/simplified if you are using one of the accounting schemes that make it simpler to account for VAT, such as the Flat Rate Scheme or the Cash Accounting Scheme. Neither of which removes the need for you to issue sales invoices, they just make it simpler to account for VAT.

It is recommended that you keep a list of all the invoices you issue. This would be a simple list showing the:

  • date of issue;
  • invoice number;
  • customer name;
  • value of the supply (i.e. the ex-VAT amount on the invoice); and
  • the amount of VAT on the invoice.

At the end of each VAT period you add up the totals for the last two items. These account for entries in two of the boxes on your VAT return.

Purchases

How you record these will mainly depend on the type of accounting you do. The essential thing is that you record all your purchases and the amount of VAT on each invoice you receive, provided you are allowed to claim the VAT from HMRC.

Most important is that you get an invoice for most of the purchases you make. There are a few, very few, items where having an invoice is unnecessary – mainly because it is recognised that getting an invoice is nigh on impossible. More on this later.

Get into the habit of asking for a VAT invoice for every business purchase you make.

If you fail to get an invoice as often as you can you will be giving away money to HMRC because without the invoice you make it more difficult to justify your claim for the VAT on that invoice.

Remember there are things on which VAT is charged at the zero or reduced-rate, or that are exempt from VAT, so don’t just calculate the VAT you can recover on all the invoices you receive.

The VAT on your business expenses (input tax) is not always recoverable. You can only recover VAT on goods or services to be used in your business.

If you make exempt supplies, e.g. receive rent for a flat, you have another issue to deal with: Partial Exemption.

That’s enough for now. More information in a day or two.

In the meantime, if you have any questions leave a comment below and I’ll be back to answer it soon.

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