Should you be registered for VAT? Almost certainly – unless you do a lot of work (say over half your turnover) for private individuals or companies that aren’t VAT registered. Otherwise you’d be crazy not to register for VAT – you’re just handing the government your money.
Having decided that you need to be registered for VAT you need to decide which scheme and which accounting method you’ll use.There are two relevant VAT schemes that apply to you as a courier – either ‘normal’ VAT or the Flat Rate Scheme (FRS). Both schemes give you the option of cash basis or accrual basis accounting. Accrual basis means that you account for VAT based on the invoices you’ve raised during the VAT quarter whereas cash basis means you only account for the VAT on payments you’ve actually received from your customers.
Unless you’re paid up front by your customers and pay your suppliers on extended credit you should always choose to account for your VAT on a CASH basis – that way you’re not paying HMRC any VAT that you’ve not already received from your customer. So that leaves you with a choice of Cash Accounting (‘normal VAT’) or the Cash Based Turnover Method (FRS).
So FRS or normal VAT? As a general rule:
Do you hire or lease your van, rather than buying outright/HP/bank loan?
Do you sub out more than 30% of your turnover work to VAT registered suppliers?
Do you drive a van larger than a Fiat Scudo?
If you answer yes to 2 or more questions you’ll probably be very slightly worse off on the FRS.
More accurately though: work out how much VAT you pay on fuel, van hire, repairs, CX membership, subbed out jobs (only the VAT registered subbies) and mobile phones etc over the course of a month. (you can just add the total spend and multiply by 0.1489 to work out the VAT).
Add up your turnover for the same period and multiply it by 0.06925. If the first figure is lower than the second you’ll be financially better off on the FRS. If the figures are about the same then I’d suggest that you go on the FRS anyway as it’s a lot easier to administer.
How much could you save by registering for VAT? If your turnover is £800 per week you’ll be £55.40 per week better off under the Flat Rate Scheme (£64.80 for your first year of registration) plus you’ll be able to claim back the VAT on any vehicle costing over £2,000 which you buy after you register OR WHICH YOU BOUGHT IN THE THREE YEARS UP TO THE DATE YOU REGISTERED AND STILL OWN AT THE TIME OF REGISTRATION. So that van that you paid £8,000 plus VAT for a couple of years ago is worth a £1191 VAT refund when you register.
The Flat Rate Scheme takes 10 minutes or less a week to administer – it’s that simple. All you have to do is add 17.5% on to every invoice you issue and then calculate 9% (8% in year one) of every payment you receive. Put the 9% in a separate savings account at the time you receive it and hand it over to HMRC every 3 months. Job done and 7% of your turnover added on to your bottom line profits.
If you decide against the FRS you’ll still be able to claim a refund on the purchase of your van (as above) but you’ll also be able to claim back the VAT on all your other qualifying business expenses. With fuel at a pump price of £1.15/litre how far would you drive to fill up at £1.00/litre? That’s what you’d be effectively paying if you were VAT registered.
Whichever scheme you go for you need to stop throwing money down the drain and register NOW. If your accountant tells you not to register then get a better accountant. It’s as simple as that.