EMTACS
Entertainers and Musicians Taxation & Accountancy Services
69 Loughborough Road, West Bridgford, Nottingham, NG2 7LA
Phone 0115-981-5001 Fax 0115-981-5005

HOW DOES VAT WORK?

Part I | Part II

Registering

You have to register for VAT if your turnover (that's total money coming in) was more than £61,000 in the last twelve months. That means that if you are getting £10,000 a month in for instance, you can avoid having to register for the first six months, if you want to.

You can register before you go over the line or even if your turnover is never likely to get above £55,000. The registration limit is only there to force it on bigger earning people and businesses. It isn't a limit you have to reach before you're allowed to register.

VAT on Your Income

Once you are registered, you have to charge an extra 17.5% on everything that you make. So, instead of sending out a bill for £1,000 to somebody, you now have to send out a bill for £1,000 plus £175 VAT. If the person to whom you are sending the bill is a big business or is VAT registered in some way themselves, they don't care that you've become more expensive.

They have to give you an extra £175 but that money belongs to Customs & Excise and you have to hand it on to them at the end of the quarter. In turn, Customs & Excise give back the £175 to the other business and so the money just moves in a little triangle. This might sound senseless and futile but it keeps them in a job.

VAT on Spending

The same triangular system works when you are charged VAT. Suppose your accountant sends you a bill for £100 plus £17.50 VAT. You have to fork out the extra £17.50 to the accountant, who passes it on to Customs & Excise. However you can claim it back from Customs & Excise when you do your quarterly VAT Return. You do this by subtracting it from the £175 you've just been given, so you hang on to the amount of any VAT you've had to pay out on business expenses.

Bringing it All Together

Once every three months you will be sent a green VAT Return form, which has to be back with Customs & Excise by the end of the following month. The form asks you to produce a grand total of the VAT you've charged people in the previous three months and the amount of VAT that others have charged you. You then owe them the difference.

Of course, this means that even if you've not been paid for a job where you've sent out the invoice, you owe the VAT on it. Obviously, it works the other way as well. You can claim back VAT on something, even though you haven't paid the bill yet.

How it Works When We Do It

Once a quarter you'll be sent a VAT form to declare three months of turnover and spending. A few days after the green form has arrived, we'll call you and nag you to let us have a brown envelope/plastic bag of all of the payslips, receipts, etc that have accumulated in your life during the previous three months.You bundle these up together with the green form and send them to us, we do the bookkeeping and turn it into a coherent list of what you've earned and what you've spent during the three months. We also work out how much of the VAT that you've been given has to be handed on to Customs & Excise and then let you know.

VAT Receipts

One thing is very important to remember when collecting the bits of paper necessary to do the VAT Return. There are certain rules on what goes into making a valid VAT receipt. If you want to claim the VAT back, you have to have the name of the shop/person, the date and their VAT number.

Without these, you might find that the expense can be set against tax but you can't get back the VAT you've been charged. The VAT people have regular inspections to make sure you aren't cheating here.

The most common cock-up is where you get a credit card slip that looks like a valid receipt but which doesn't always have a VAT number on it. This is most common on petrol station forecourts and you quite often have to ask for "a VAT receipt", in order to get something on which you can reclaim it.

For more on VAT and the other ways of doing it, click here...