Forum Message

Start-up business - best VAT model ?

Hi all,

We have just started up and made the first sale, and I need to quickly make decisions on which VAT scheme to use for our first VAT return due now, especially whether to use the VAT flat rate scheme and/or VAT cash basis?,

We have started importing goods from one particular supplier in the EU for resale via the internet, mainly to VAT registered businesses in the UK (but some are not VAT registered). We don't have to pay for the goods from the EU until 30 days after we get out own payment from our UK customers. The first shipment of goods arrived with a "proforma invoice" with no VAT charged to us (we are VAT registered in the UK). Besides the goods from the EU, our main ongoing expenses will be stationery and postage (both UK sourced) ... and also staff costs when business starts to boom!

It looks like the applicable flat rate would be 7.5% (6.5% for the first year) for "Retail that is not listed elsewhere". That seems to make it very attrractive if we are charging 20% to unregistered clients - but have I overlooked something regarding the tax on the imported goods? Or on what happens with VAT-regiustered clients? Does Solar Accounts handle all this automatically?

The idea is that all of our sales will be via the ineternet, with clients paying upfront. However, we would also aim to have larger clients who might insists on payment upon invoice. So would the cash basis have any advantages when the business is just prepaid, or woud it only become beneficial once we get clients who pay later? Does Solar Accounts have a Wizard to show the results both ways?

Many thanks!
Richie


Posted by Richie on Jul 8, 2011 11:44 AM BST

Hi Richie,

Wow, that's a complicated question - let me answer in point form:

  1. Firstly, I am not an expert on this and what follows is a general 'birds eye' analysis of your circumstances. I strongly recommend you get advice from an accountant.

  2. Note that if you want to use the Flat Rate Scheme, you must apply to HMRC by submitting a form. They will then tell you if you have been accepted. This is not the case for using the 'cash method' - you can just use this method without needing to notify HMRC.

  3. From your perspective there is no difference between registered and unregistered UK customers - you charge 20% VAT to all.

  4. There is no benefit to the cash method if all your sales are 'up front'. If you are on the flat rate scheme and some of your customers buy on credit then it would make sense to use the cash method.

  5. Solar Accounts is designed to automatically produce your VAT return figures. From your description I cannot see anything that would require you to make manual adjustments to the figures.

  6. Solar Accounts does not have a report which compares the flat-rate to non-flate rate options. However, if you are under the flat rate scheme then Solar Accounts will keep track of the profit (or loss) due to this scheme in a separate income account.

  7. Keep in mind that you will need to pay 20% on EU imported goods to HMRC even if you are under the flat rate scheme (this 20% will appear in Box 2 of your VAT return). This means that the size of your price markup will have a big impact on whether you should use the Flat Rate Scheme. For example, say you import goods for £100 and sell them in the UK for £150 (+ £30 VAT). Under the normal VAT rules your profit is £50. Under the flat rate scheme your profit would be £180 - £100 - £20 - (£180 x 6.5%) = £48.30. So in this case it would not be beneficial to use the Flat Rate Scheme.

  8. My understanding is that you will need to account for the 20% VAT on the imports at the time you receive the goods, even if you have not been given an invoice by your supplier.

Regards,


Posted by Mark McLaren (Solar Accounts) on Jul 8, 2011 1:04 PM BST

"Wow!" (and many thanks!) to Mark for such a fast and comprehensive response!

Items 1-6: accepted/agreed.
Item 7: I need to go through those numbers a few times to let it all sink in!
Item 8: Does Solar Accounts allow you to enter Expenses (i.e. my supplies from the EU) in another currency (EUR in this case)?

Further to Items 4/8: I also found in the HMRC website:
"When you must not use cash accounting/ Even if you use cash accounting, you must still account for VAT using standard VAT accounting when you: ... import goods or acquire goods from other EU states".

I understand from this that, even if I use the cash basis for sales, I still need to use the accruals basis for my EC acquisitions i.e. pay the VAT on them as soon as they arrive = include them Box 2 of the very next VAT return.


Posted by Richie on Jul 8, 2011 1:40 PM BST

Hi Richie,

Glad to hear you like our support!

Solar Accounts cannot record your expense in EUR - you will need to enter it in pounds using an appropriate exchange rate.

Also if you set the VAT Treatment on the purchase invoice to 'Purchase of Goods from EU Supplier' then Solar Accounts will use the accrual basis on the VAT return for this transaction, even if other transactions use the cash basis.

Cheers,


Posted by Mark McLaren (Solar Accounts) on Jul 8, 2011 2:48 PM BST

Thanks Mark!

I found the Exchange Rates page on the HMRC website, so we could easily apply their monthly rate to our EUR expenses.

Even if there are no plans to support other currencies, it would nevertheless be helpful if Solar Accounts' Expenses dialog page could allow a free-text box in which I could write the amount in Euros and the applicable exchange rate, just as an easy way to see how I came to the figure shown in pounds.

Or is that already availbale and I have missed it?


Posted by Richie on Jul 8, 2011 3:13 PM BST

Hi Richie,

The Journal Memo field essentially acts as a free text field - you can type the EUR details into this field.

I'll record your email address to be notified in case we add multi-currency support in future.

Regards,


Posted by Mark McLaren (Solar Accounts) on Jul 8, 2011 3:40 PM BST