Exceptions for small businesses - help or hindrance?

Have you decided to set up your own business, or a company? Especially in the first few phases, there are many things to consider – both bureaucratic and financial. For example, the monthly or quarterly VAT returns makes everyday work difficult for smaller companies in particular. Furthermore, generating enough steady income is a hurdle at which many start-up companies fall. A potential silver lining – the EU’s special schemes to help small and medium sized enterprises (SMEs). It offers opportunities for founders and small businesses, but also has its disadvantages – it really depends on your situation as a business, so it might be worth checking out which regulations could apply to you.

What are these special schemes?

There are three schemes which were put in place by the EU to help SMEs. These regulations are the possibility to register as VAT exempt, to relieve the amount of tax due on SMEs income, and to help simplify all things taxation. These schemes aim to reduce the burden on small businesses as they are just starting off – or even if they’re having to face setbacks. If you decide to make use of the small business schemes it is important to note that there may be some restrictions you’ll have to face. For example, you may not charge any VAT, and you also lose the right to claim back the value added tax shown on invoices of other companies as input tax.

Who can make use of these three schemes?

Not everyone can be exempted from VAT by the small business regulation. This option is reserved exclusively for so-called small businesses. The Value Added Tax Act defines such a small company on the basis of its turnover. To be considered a small business, your turnover...

  • will (most likely) not exceed £85,000 in the current financial year.

You must register for VAT if your VAT taxable turnover is more than £85,000, and if you realise that you will exceed this amount (total for a twelve month period), within a thirty day period.

Note

You must register for VAT even if you only sell VAT exempted goods and/or services, but you do buy goods or services over an amount of £85,000 from any EU VAT-registered suppliers within your business, for your business

Since you have to recalculate the sales limits every year, taxation can change from year to year:

For example:

 

Predicted revenue

Actual Revenue

VAT exemption?

2014

 

£78,000

 

2015

£80,000

£84,000

Yes, since the actual revenue in 2014 < £81,000

2016

£85,000

£80,000

No, since the actual revenue in 2015 > £82,000

2017

£80,000

£86,000

yes, since actual revenue in < £82,000

2018

£85,000

 

no, since the previous year actual revenue > £85,000

Here you can see that the VAT exemption thresholds change each year – and they usually increase. This means that even if you were within the VAT exemption for 2016, this may not apply any more for 2017, or 2018 for example.

How is the limit determined?

Total sales are calculated on the basis of the gross amounts received. However, this does not include “fixed assets” (e.g. the sale of a used company car). The amounts are made up of the net amount and the VAT and possible other taxes. If this is not the case, the net amount is the gross amount. You do not then have to add VAT.

If you want to calculate the sales limit for a year, you must take all sales for the period into account. It does not matter when you provided the services or issued the invoices. The only decisive factor is the actual receipt of payments. The so-called 10-day rule for the turn of the year for VAT does not apply. This means that you cannot assign payments received within this period before and after the fiscal year change to the year of your choice. Nevertheless, it is of course possible to influence the VAT limit through targeted control of the outgoing invoice.

For example:

Its total turnover in the calendar year 2018 will be £84,000  by the end of November. You can issue an invoice of £1,500 to a customer:

  • For example, if you invoice on 12.15.2018 and the customer pays on 12.23.2018, your total revenue will increase to £85,500 s in 2018. This means that you cannot apply the small business regulation 2019.
  • If you invoice this amount on 02.01.2019, your total turnover in 2018 will remain £84,000, and you can also apply the small business regulation in 2019.
  • However, if within the twelve month period between 02.01.2018-02.01.2018 you would make more than the VAT threshold, you would still have to apply for VAT – you should reassess this every month.
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VAT exemption: How does this affect you?

Quite simply, you won’t have to pay VAT to HMRC for domestic sales. Furthermore:

  • You may not charge any VAT in your invoices.
  • You may not deduct input tax from external invoices.
  • You do not have to submit a VAT tax return – or:
  • You only have to file the annual VAT return in a simplified form.
  • You must still observe the tax regulations for issuing invoices.
Note

Even if you make use of these special schemes, you still have to pay VAT to HMRC in certain cases. This is the case, for example, with cross-border trade in goods - for example, if you use services from a foreign company.

What SMEs need to consider when issuing invoices

If you make use of these schemes for SMEs, you must observe certain guidelines when issuing an invoice:

  • You may not show any value added tax on invoices.
  • You may not show a VAT identification number (VAT ID no.) on an invoice.
  • You must highlight on the invoice that you do not charge VAT due to these EU regulations, which are applied in the UK too.

Pros and Cons of VAT exemption

VAT exemption is a scheme in place to help small and medium sized enterprises and has its pros and cons. Depending on what applies to you, you may wish to take advantage of these schemes, or decide not to.

Pros

Cons

VAT not applicable

Revenue limits are recalculated every year.

Less tax administration: no advance VAT returns and annual VAT returns in a simplified form

Costs for tax consultancy, if applicable

You don’t have to charge your customers VAT

Possible disadvantages with high input of goods

Sales limit of £85,000 for the current is only a forecast and can be exceeded

 

Please note the legal disclaimer relating to this article.


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