The rules for VAT registration are the same for self-employed people as well as limited companies.

The basic rule is if your sales is going to be more than £82,000 in the next 12 months you should register for VAT. You shouldn’t wait until you pass the £82,000 if your monthly run rate is higher than £6,833 i.e. if right from the beginning, you think you will go above annual £82,000, you should register straight away.

You can still register for VAT even if your sales don’t go above £82,000. The reason why you may do this is to appear to customers bigger than you are.

The first thing you have to do when you become VAT registered is start charging VAT on your sales invoices i.e. 20% on top of your normal fee/price.

So your invoice looks like this on a fee that you are charging to a customer of £1,000.

NET £1,000
VAT £200
GROSS £1,200

The customer then pays you the £1,200.

You then have to make sure that you get VAT receipts for all your business expenditure so that you can claim the VAT back (only on option 1 and 2, see below).

However, if becoming VAT registered isn’t complicated enough, you are then faced with 4 options of how to account for VAT.

See the ‘VAT Returns’ section for these options.

The customer then pays you the £1,200.VAT returns can be quarterly or annual (we recommend quarterly)

VAT returns can be quarterly or annual (we recommend quarterly)

The amount depends on what VAT method you are on.

Option 1 – VAT on invoices

You declare to HMRC all the VAT on your invoices in the quarter minus all the VAT on your purchase invoices and expenses.

This is the most common way of accounting for VAT.

Option 2 – VAT on cash

You declare to HMRC all the VAT on your sales receipts in the quarter minus all the VAT on your purchase invoices and expenses.

The advantage of this is that you are only ever paying VAT over to HMRC that you have received from your customer. In option 1, you could pay VAT over to HMRC on an invoice that hasn’t been paid yet.

The disadvantage of this is that makes the bookkeeping more complicated.

Option 3 – VAT on invoices using the flat rate scheme

The flat rate scheme is for businesses of less than £150,000 turnover (sales)

Rather than option 1, you are assigned by HMRC a specific flat rate %. So for example 12%. The % is based on your type of business.

You then add up all your sales invoices and INCLUDE the VAT – i.e. you add up the GROSS amount of your invoices (the NET + the VAT = the GROSS) and then you multiply this amount by the flat rate %.

Sounds like a no brainer since your flat rate % will be lower than %. However, you COMPLETELY IGNORE the VAT on your expenditure.

(I say COMPLETELY IGNORE, there is a special rule that means you can still claim the VAT on ‘capital costs’ over £2,000 even on the flat rate scheme)

VAT is probably one of the most complex of taxes, but it just got a whole lot more complicated……

So if you want to know whether you are affected by VAT MOSS – see below….

1. Do you sell to the EU?

2. Do you sell digital products or digital services (no or minimal human intervention)?

3. Do you sell business to consumer in the EU (if you sell to a ‘marketplace’ this could be ‘business to business’ and therefore MOSS doesn’t apply)

If the answer is yes to all 3, you have to:

1. Register by 10 February 2015

2. Complete VAT MOSS returns (starting with the quarter ended 31 March 2015)

3. Account for the VAT on the country of the customer (not UK VAT)

Important: All this applies whether or not you are registered for VAT in the UK

If you need help with this, email me at russell@rsaccountancy.co.uk

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