BUSINESS ORIENTATION

AND VAT CLASS

Business Orientation
Accounting work flow
¨  Business Documentation
¨  Account Groups (Transactions Types)
¨  Subsidiary Ledger
¨  Nominal Ledger
¨  Profit and Loss
¨  Balance Sheet
Different business types
¨  Sole Trader
¨  Limited Companies
¨  Partnerships
¨  Not for Profit Organisations
In-house and Outsourced Accounting Functions
¨  Responsibilities of In-house and outsourced Bookkeepers
¨  Pros and cons of the two different functions
Accounting Work Flow
Choosing a company type

¨  Is up to the discretion of the individual to choose the company

type that would best fit for the business future.
¨  Once the structure or company type is chosen all the legal
responsibilities are defined.
- The paperwork to fill in to get started
- The taxes the company will have to manage and pay
- The personal entitlement for utilising the profit that the
business makes
- The personal responsibilities if the business makes a loss
Sole trader
¨  If you start working for yourself, you’re classed as a self-employed  sole
trader- even if you’ve not yet told HM Revenue and Customs (HMRC).
¨  As a sole trader, you run your own business as an individual. You can keep
all your business’s profits after you’ve paid tax on them.
¨  You can employ staff. ‘Sole trader’ means you’re responsible for the
business, not that you have to work alone.
¨  You’re personally responsible for any losses your business makes.

Tax responsibilities
¨  send a Self Assessment tax return every year

¨  pay Income Tax on the profits your business makes

¨  pay National Insurance contribution

You must also register for VAT if you expect your takings to be more than
£83,000 a year.
Limited Company
¨  A limited company is an organisation that you can set up to run your business - it’s responsible
in its own right for everything it does and its finances are separate to your personal
finances.
¨  Any profit it makes is owned by the company, after it pays Corporation Tax. The company can
then share its profits.
Ownership
¨  Every limited company has ‘members’ - the people or organisations who own shares in the
company.
¨  Directors are responsible for running the company. Directors often own shares, but they don’t
have to.
Tax responsibilities
Every financial year, the company must:
¨  put together statutory accounts
¨  send Companies House an annual return
¨  send HMRC a Company Tax Return
The company must register for VAT if you expect its takings to be more than £83,000 a year.
Partnership
A partnership is an agreement between two ore more people. There
are three types of partnership, and the responsibilities differ as follow:

1.  General partnership : equal shares in profits and liabilities for the
company, also equal responsibilities for the companies solvency and
unlimited liability making this type of partnership a high risk for
individual partners.
2.  Limited liability partnership: offers more protection for partners
personal assets by limiting their liabilities to that of their interest in the
company only. All partners are allowed to manage the business like in the
general partnership however a formal agreement is required.
3.  Limited partnership: differs from the LLP by requiring at least one
general partner to manage and take on all risk, while passive limited
partners enjoy liability up to their investment level. General’ partners can
be personally liable for all the partnerships’ debts, while limited partners
are only liable up to the amount hey invest in the business
Tax for partnerships

q  Every year, the partnership must send a  partnership

Self Assessment tax return to HM Revenue and Customs
(HMRC).
q  All the partners must:

§  send a personal Self Assessment tax return every year

§  pay  Income Tax  on their share of the partnership’s

profits
§  pay National Insurance contribution

You must also  register the partnership for VAT  if you

expect your business’s takings to be more than £83,000 a
year.
Not For Profit Organisation
¨  Not for profit is a type of organization that does not earn profits
for its owners.
¨  All of the money earned by or donated to a not for profit
organization is used in pursuing the organization's objectives.
¨  Typically not for profit organizations are charities or other types of
public service organizations.
¨  Generally, not for profit organizations can apply for a tax
exempt status so that the organization is not subject to most forms
of taxation.
¨  Donations made to a tax exempt not for profit organization may
also be tax-deductible for the donor
Not For Profit Organisation

¨  The UK tax system recognises 3 major non profit organisation

types
1.  Charities, are exempt from most direct taxes
2.  Community Amateur Sport Clubs , which have some tax
reliefs and which can offer limited tax relief to supporters,
but are beyond the scope of this work
3.  Other non profit organisations ( including community interest
companies ) which receive no preferential tax treatment and
are liable for taxes in the same way as commercial
businesses
In-house and Outsourced Accounting
Functions
¨  In house function refers to conducting the accounting within a company relying
on companies own employees. In other words the company has got his own
accountant employed to manage the accounting and payroll functions internally.
¨  Outsourced function refers to companies without the resources or infrastructure
to manage the accounting and payroll functions internally. These companies
would outsource the accounting function to an accounting setting and would use
one of the following service provided by the setting:

•  VAT return
•  Prepare financial statements
•  Management accounting
•  Corporation tax return
•  Annual return
•  Payroll
Responsibilities of In-house and outsourced
Bookkeeping

The responsibilities in an in-house function would

include starting from bookkeeping duties like Vat return the
financial reports, tax returns to managerial accounting
duties as well as budgeting or financial planning.
Looking at the duties from outsourced perspective they
can wary depending on the need of the particular company.
So from outsourced perspective responsibilities can start
from as little as doing only the VAT return and can extend to
an entire package up to corporation tax return ,
management accounts, payroll and so on.
 PROS & CONS

PROS
§  Your accounting needs may be very specific, specialized or unusual and
outsourcing could cost you more than hiring your own accountant
§  The outsourced services usually come with a package that may not always fits your
own needs
§  Multi – tasking is a must in growing companies and with external workers will either
not be keen on offering this or wont have the time or skills to meet your need.
§  Having your own accountant brings an other forgotten value to your business,
loyalty.
§  External accountants might follow a process that would not entirely fit your needs
PROS & CONS

CONS
§  There might be some points of the year when is quieter than others so the
accountant would be less busier resulting in high cost but low benefit for the
company
§  It can be hard to recognize the perfect candidate to hire but choosing a well known
accounting setting with high reputation might be easier nowadays .
§  Setting up your own rules could be time consuming and if your accountant is fresh
out of studies you might have to face constant revisions in the firs years and
without an expertise chances are that revisions will not only be improvements.
§  Hiring someone will mean that you will have to bear the bill for a complete
package – salary, benefits, office space, accounting software, etc. When outsourcing
you pay a monthly fee that frees you from all these cost
Value Added Tax
¨  What is VAT
¨  VAT registration
¨  Businesses and charging VAT
¨  VAT rates on different goods and services
¨  VAT record keeping
¨  VAT Schemes
¤  Annual accounting Scheme
¤  VAT Cash Accounting Scheme
¤  VAT Flat Rate Scheme
¤  VAT Margin Schemes
¤  VAT Retail Schemes
¨  6 VAT Returns
What is VAT?
§  Is a tax on consumption in other words a sales tax
levied in the UK by the national government
§  Is the third largest source of government revenue after
income tax and NI contribution
§  Is administered and collected by HMRC
§  Is levied on most goods and services provided by
registered businesses in UK
§  Is an indirect tax because the tax is paid to the
government by the seller rather than the consumer who
ultimately bears the economic burden of the tax
General principles
¨  When a business sells goods or services VAT is
added to the selling price.

VAT

Input VAT Output VAT

Input an Output VAT
¨  Input VAT – Is the VAT suffered by the business on
its purchases and expenses

¨  Output VAT – is the VAT charged by the business on

its sales

Input VAT > Output

VAT
Than the government will refund the
amount to the business

Than the business will pay over

Input
VAT < Output
VAT to the government the difference
VAT Registration and Deregistration
¨  A business that makes taxable supplies may choose or may be
required to register for VAT
¨  All the businesses that provide “taxable” goods and services and
whose taxable turnover exceeds the threshold in any given 12
month ( £ 83000 since 1 April 2016 )must register for VAT
Taxable turnover is the turnover from standard rated, zero rated
and reduced rated supplies.
¨  Below the threshold, voluntary registration is permitted.

¨  Voluntary deregistration is also permitted if the taxable turnover

falls or is expected to fall below or be equal with the deregistration
threshold (£ 81000) in any 12 month period
Taxable turnover

Zero rated

Standard
Taxable
Rated
Reduced
Turnover Exempt
Rated
Outside the
scope of vat
Responsibilities
¨  VAT-registered businesses: must charge VAT on their goods or
services
¨  may reclaim any VAT they’ve paid on business-related goods or
services
¨  If you’re a VAT-registered business you must report to HM Revenue
and Customs (HMRC) the amount of VAT you’ve charged and the
amount of VAT you’ve paid. This is done through your VAT Return
which is usually due every 3 months.
¨  You must account for VAT on the full value of what you sell, even if
you: haven’t charged any VAT to the customer - whatever price you
charge is treated as including VAT If you’ve charged more VAT than
you’ve paid, you have to pay the difference to HMRC. If you’ve paid
more VAT than you’ve charged, you can reclaim the difference from
HMRC.
VAT Rates
¨  There are 3 different rates of VAT and you must make sure you charge the right
amount. Get a list of reduced or zero-rated goods and services.
https://www.gov.uk/guidance/rates-of-vat-on-different-goods-and-services
¨  Standard rate: Most goods and services are standard rate. You should charge this
rate unless the goods or services are classed as reduced or zero-rated.
¨  Reduced rate: When to charge this rate can depend on the item being provided but
also the circumstance of the sale. For example: children’s car seats and domestic fuel
or power are always charged at 5% mobility aids for older people are only
charged at 5% if they’re for someone over 60 and the goods are installed in their
home
¨  Zero rate: Zero-rated means that the goods are still VAT-taxable, but the rate of
VAT you must charge your customers is 0%. Examples of zero-rated goods include:
books and newspapers children’s clothes and shoes motorcycle helmets You still have
to record zero-rated transactions in your VAT accounts and report them on your VAT
Return. Rates can change and you must apply any changes to the rates from the
date they change.
EXAMPLES
§  Standard rated : Bottled water, Clothes and footwear
for adults, confectionary, electrical goods
§  Reduced rated : Children’s car seat, electricity, gas,
heating, sanitary products, mobility aids for elderly
§  Zero rated : books, maps, helmets, leaflets, children’s
clothes, raw food, public transport
§  Exempt : Antiques, art, commercial land & buildings,
education, financial services, postage stamps or services
§  Outside the scope of VAT : statutory fees and services,
toll charges( bridges, tunnels and roads operated by
public authorities), voluntary donations for charities
 3. What you must do when charging
VAT
¨  You need to know the right VAT rate so you can charge
it correctly and reclaim it on your purchases.
¨  If a transaction is a standard, reduced or zero-rated
taxable supply, you must: charge the right rate of VAT
work out the VAT if a single price is shown that includes
or excludes VAT show the VAT information on your
invoice show the transaction in your VAT account –
¨  a summary of your VAT show the amount on your VAT
Return You may be able to reclaim the VAT on
purchases that relate to these sales.
¨  You can’t claim back all of the amount you’ve paid if
you pay the wrong amount of VAT on a purchase.
4. VAT-Inclusive & Exclusive Prices
¨  You’ll need to make a calculation when charging VAT on
goods or services, or when working out the amount of VAT
you can claim back on items which were sold inclusive of
VAT.
¨  VAT-inclusive prices To work out a price including the
standard rate of VAT (20%), multiply the price excluding
VAT by 1.2. To work out a price including the reduced rate
of VAT (5%), multiply the price excluding VAT by 1.05.
¨  VAT-exclusive prices To work out a price excluding the
standard rate of VAT (20%) divide the price including VAT
by 1.2. To work out a price excluding the reduced rate of
VAT (5%) divide the price including VAT by 1.05.
5. When not to charge VAT
¨  You can’t charge VAT on ‘out of scope’ items.
¨  Out of scope Some goods and services are outside

the VAT tax system so you can’t charge or reclaim

the VAT on them. For example, out of scope items
include: goods or services you buy and use outside
of the EU statutory fees - like the London congestion
charge goods you sell as part of a hobby - like
stamps from a collection, donations to a charity - if
given without receiving anything in return
 4 VAT record keeping
¨  VAT-registered businesses must: keep records of sales and purchases keep a separate
summary of VAT called a VAT account issue correct VAT invoices
¨  How to keep VAT records You must keep VAT records for at least 6 years. You can
keep them on paper, electronically or as part of a software program (e.g. book-
keeping software). Records must be accurate, complete and readable. If you’ve lost a
VAT invoice or it is damaged and no longer readable, ask the supplier for a duplicate
(marked ‘duplicate’). HMRC can visit your business to inspect your record keeping and
charge you a penalty if your records aren’t in order. You can hire a professional (e.g.
an accountant) if you need help with your VAT.
¨  VAT invoices Only VAT-registered businesses can issue VAT invoices and you must:
issue and keep valid invoices - these can be paper or electronic keep copies of all the
sales invoices you issue even if you cancel them or produce one by mistake keep all
purchase invoices for items you buy You can’t reclaim VAT using an invalid invoice, pro-
forma invoice, statement or delivery note.
¨  Valid invoices You’ll use a full VAT invoice for most transactions. You can use: a
modified invoice for retail supplies over £250 a simplified invoice for retails supplies
under £250 - and for other supplies from 1 January 2013 Include the following on
your invoice, depending on which type you use.
 Invoice Information Full Simplified Modified
invoice Invoice Invoice

Unique invoice number that follows on from the last invoice Yes Yes Yes
Your business name and address Yes Yes Yes
Your VAT number Yes Yes Yes
Date Yes No Yes
The tax point (or ‘time of supply’) if this is different from the invoice
date Yes Yes Yes

Customer’s name or trading name, and address Yes No Yes

Description of the goods or services Yes Yes Yes
Total amount excluding VAT Yes No Yes
Total amount of VAT Yes No Yes
Price per item, excluding VAT Yes No Yes
Quantity of each type of item Yes No Yes
Rate of any discount per item Yes No Yes

Rate of VAT charged per item - if an item is exempt or zero-rated

make clear no VAT on these items Yes Yes (1) Yes
Total amount including VAT No Yes (1) Yes
VAT Schemes
¨  VAT Annual Accounting Scheme
¨  VAT Cash Accounting Scheme

¨  VAT Flat Rate Scheme

¨  VAT Margin Schemes

¨  VAT Retail Schemes

Annual Accounting Scheme
¨  Submitting returns on an annual basis cold be helpful for
small businesses as it cuts down administrative burden of
VAT
Conditions for joining and leaving the scheme
§  VAT registered businesses can join the scheme if turnover in
the next 12 months is expected to be no more than 1.35
million
§  The business must leave the scheme if turnover in the
previous 12 months exceeds or the estimated turnover
exceeds 1.6 million
§  Alongside using the annual accounting scheme the business
also can use either the cash accounting scheme or the flat
rate scheme
Advantages and disadvantages
Advantages
§  Only one VAT return each year

§  Two months instead of one month and seven day to

complete and send the return and payment

§  Ability to manage cash flow more accurately by

paying fixed amount in each installment

§  Traders can join the scheme immediately from the

date of registration for VAT

Advantages and disadvantages
Disadvantages
§  If turnover decreases the interim payments may be

higher than the VAT payments would be under

normal accounting scheme
§  Must wait until the end of year to receive any

refund
§  If regularly reclaim VAT, will only get one

repayment per year

 Cash VAT Scheme
¨  In VAT cash accounting scheme you only repay and
claim VAT to/from HMRC once you have received
or made the payment yourself.
¨  It is a useful tool for many small businesses, as they
are only paying back to HMRC once they are
receiving the money by themselves.
¨  It could be a life saver scheme for the businesses
which have cash flow concerns.
¨  You can join the cash accounting scheme if your
estimated turnover for the following tax year is not
greater than £1.35m, and you can continue to use
the scheme until your turnover is greater than
£1.6m.
Cash VAT Scheme Eligibility
¨  Your Business is VAT Registered.
¨  Your estimated VAT taxable turnover is £1.35

million or less in the next 12 months.

¨  You do not need to inform HMRC if you want to

join the scheme.

¨  You must start at the beginning of a new VAT
quarter (if you are already registered for VAT), or
from the first day you become VAT registered.
 Cash VAT Scheme Pros
¨  The scheme is beneficial for businesses that
gives a long period of credit for their
customers as output tax will not be due until is
received
¨  If you incur any bad debts, the VAT element

will never need to be paid to HMRC.

¨  A business that pays its supplier promptly, can

reclaim input VAT earlier than with standard

rules
Cash  VAT  Scheme  Cons  
There may be some disadvantages,
depending on your specific situation.
¨  For example, if a business receives a long
period of credit from its suppliers or is slow
to pay, as they cant claim input VAT until they
pay their suppliers
¨  A business that receives payment promptly

from its customers, as they may end up paying

output tax earlier than with the standard rules
Flat Rate  Scheme    
¨  Usually, how much VAT a business pays or claims back from HM Revenue
and Customs (HMRC) is the difference between the VAT they charge
customers and pay on their purchases.
¨  With the Flat Rate Scheme:
- you pay a fixed rate of VAT over to HMRC.
- you keep the difference between what you charge your customers
and pay over to HMRC.
- you can’t reclaim the VAT on your purchases - except for certain
capital.
¨  To join the scheme your VAT turnover must be less than £150,000
(excluding VAT) and you must leave the scheme if total value of VAT
inclusive turnover exceeds £230,000
Eligibility for  Flat  rate  Scheme  
You can join the Flat Rate Scheme if:
§  You’re a VAT-registered business
§  You expect your VAT taxable turnover to be less than £150,000
(excluding VAT) in the next 12 months
VAT taxable turnover is the total of everything sold that isn’t VAT exempt.
 Exceptions
You can’t use the scheme if:
§  You left the scheme in the last 12 months
§  You committed a VAT offence in the last 12 months, e.g. VAT evasion
§  You’ve joined a margin VAT scheme
Advantages and Disadvantages
Advantages
§  It simplifies the administration as the VAT on each
individual sales and purchase invoice does not needs to
be recorded
§  There may be less VAT payable to HMRC than under
normal rules
§  Cash flow can be managed more easily as there is
always a certainty as to what percentage of turnover
will be paid to to HMRC
§  A discount is given in the first year of VAT registration
of 1 % reduction to the flat rate
Advantages and Disadvantages
Disadvantages
§  Input VAT can not be reclaimed on purchases and expenses

§  The flat rate percentage is applied to all turnover including

zero rated and exempt supplies
Might not be suitable for the following type of businesses:
•  Those in a trade with high flat rate %

•  Those making a lot of zero rated or exempt supplies

•  Those who regularly receive a VAT repayment under

standard scheme
•  Those whose purchases and expenses are mainly standard
rated
 Marginal VAT Scheme
VAT margin schemes tax the difference between what you paid for an item and
what you sold it for, rather than the full selling price. You pay VAT at 16.67%
(one-sixth) on the difference.
You can choose to use a margin scheme when you sell:
¨  second-hand goods

¨  works of art

¨  antiques

¨  collectors’ items

You can’t use a margin scheme for:

¨  any item you bought for which you were charged VAT

¨  precious metals

¨  investment gold

¨  precious stones

 Marginal VAT Scheme
Second-hand goods
Goods that can still be used, or which could be used after repair.
Works of art
Most items normally described as ‘works of art’ are eligible. There are
some exceptions, e.g. technical drawings, scenery for theatres and hand-
decorated manufactured items.
Antiques and collectors’ items
Antiques are goods that are over 100 years old. Collectors’ items are
stamps, coins and currency and other pieces of scientific, historical or
archaeological interest. Not all items that can be collected are eligible for
a margin scheme.
Keeping Records
To use the margin scheme, you must have invoices for each item that
meet the VAT margin scheme requirements.
You must have:
¨  an invoice from the seller when you bought the item

¨  a copy of the invoice you gave to the buyer when you sold the item

You must keep the usual VAT records when you use a margin scheme.
You must also keep:
¨  a stock book that tracks each item sold under the margin scheme
individually
¨  copies of purchase and sales invoices for all items

¨  You must keep VAT records for 6 years. You have to keep records until you
sell the item for any stock you bought more than 6 years ago that you plan
to sell under the margin scheme.
 Marginal VAT Return
You must show any goods you bought or sold using a margin scheme on
your VAT return.  
  Box on the VAT What to fill in
Return form
Box 1 Include the output tax due on all eligible goods
sold in the period covered by the return
Box 6 Include the full selling price of all eligible
goods sold in the period, less any VAT due
on the margin
Box 7 Include the full purchase price of eligible goods
bought in the period
VAT retail schemes
¨  Retail industry-Retail is the sale of goods to end
users, not for resale but for use and consumption by
the purchaser. The retail transaction is at the end of
supply chain.
Supply chain :

Manufacturers è Retailers è Consumers

¨  Manufacturers sell large quantities of products to

retailers and retailers attempt to sell those same
quantities of products to consumers.
 VAT retail schemes
§  If you sell goods you must calculate how much VAT to record in
your VAT account.
§  VAT retail schemes can make calculating your VAT simpler.
Instead of calculating the VAT for each sale you make, you do
it once with each VAT return.
§  You can use a retail scheme together with the Cash Accounting
Scheme.
§  You can’t use retail schemes with the Flat Rate Scheme.
Types of VAT Retail Schemes
§  Point of Sale Scheme - you identify and record the VAT at the
time of sale
§  Apportionment Scheme - you buy goods for resale
§  Direct Calculation Scheme - you make a small proportion of
sales at one VAT rate and the majority at another rate

If your turnover excluding VAT is over £130 million you

must agree a bespoke retail scheme with HM Revenue and
Customs (HMRC).
 Joining and leaving the scheme

Joining and using a scheme

You can join a retail scheme at the beginning of any VAT period. You
don’t need to tell HMRC
It’s up to you which scheme you join.
You must provide an individual VAT invoice if a customer asks for one.

Changing and leaving a scheme

§  You can leave a scheme at the end of any VAT period. If your
turnover rises above £130 million you’ll have to leave the scheme
immediately.
§  You can change to another scheme after 1 year of joining a
scheme.
Submitting VAT
¨  VAT Return is usually submitted to HMRC every 3
months known as the accounting period
¨  VAT Return must be sent even if the business has a

nil return ( no VAT to pay or reclaim)

VAT Return
Thank you for your attention