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 II

Part I | Part II

FLATE RATE VAT

About 3 years ago Customs and Excise acknowledged that VAT was a bit of a pain in the neck. Well, they've known this all along. They've only just got around to admitting it that's all. In the spirit of making things simpler they introduced something called Flat Rate VAT. This takes away a good part of the fiddly paper-work behind doing VAT Returns. No more do you have to scrabble around for that 40p invoice for photocopying so as to ensure that the VATman accepts your reclaiming the 6p VAT.

In Flat Rate VAT the VATman accepts that people are going to reclaim a certain fixed percentage, determined by their profession. Entertainers and Journalists have a percentage of 11%. This means if you charged £1,000 + £175 VAT you'd have to hand over £1,175 x 11% or £129.25. So, you've received an extra £175 and paid out £129.25, for a profit of £45.75 on the deal. In exchange for this you can no longer make reclaims on the VAT in the expenses that you've incurred. No paperwork required (well you have to keep your 'sales' invoices for the work done), just 30 seconds with a calculator and 15 seconds to fill out a form.

They even make allowances for you if you have to buy something big. You can still claim back any VAT incurred on single purchases of £2,000 or more. This is a guaranteed money maker so long as your VATable expenses are no more than a quarter of your income. So if you have an agent charging you 25% + VAT on all your income then forget the whole idea.

However there is a bit more to it than meets the eye so this one is definitely worth talking to us about.

CASH ACCOUNTING

This is another scheme to help the poor, harassed taxpayer. Normally you prepare VAT Returns on the basis of the date on the invoice or the date of the gig. This isn't always the date on which you get paid and so to try to help out, Customs will let you elect for Cash Accounting. This enables you to use the dates on which you got paid, rather than the invoice date. This is especially useful if you never get paid as it includes relief for bad debts.

The down side of course is that you can only reclaim VAT on the items you have paid for, so if you buy something but don't pay for it until a couple of months later, you can't include this. That doesn't apply to credit card purchases where you're deemed to have bought stuff, even if you aren't actually paying the card off.

ANNUAL ACCOUNTING

Another little widget that Customs & Excise offer that will help. This scheme is for those who don't actually like preparing their VAT Returns too often. You can elect to do only one VAT Return per year and to have two months in which to do it. In many ways this is my favourite scheme as it also has in it in element of smoothing out the VAT that you have to pay.

Suppose your VAT bill last year was £7,000 over the 4 quarters up to 31 March 2006. When you go on to Annual Accounting you start to make interim payments on a monthly basis, for nine months from July 2006 to March 2007. Each payment will be 10% of the previous year's total VAT, so £700 in this instance. You then get sent a Return for the year ended 31 March 2007 - suppose you owed £8,000. You've already paid £6,300 and just have the remaining £1,700 to pay by 31 May. Then in July you start on the £800 instalments for the next year.

It sounds a lot more complicated than it actually is and it's not proved very popular for that reason. Also one of the joys of being registered for VAT is the quarterly discipline that it imposes on people who don't really want to ever do any bookkeeping at all. As with Flat Rate and Cash Accounting, these things should be discussed further because there are circumstances that favour or disadvantage you.

Back to Part I!