For those of you who don’t like reading I’ll say right at the start that I think YOU SHOULD GET REGISTERED FOR VAT AS SOON AS POSSIBLE unless a large proportion of your work is for private individuals or non-registered businesses.

I’ve made a calculator to show how much extra profit you’d make by being VAT registered and to work out whether the Flat Rate Scheme is better for you.

While processing our suppliers’ invoices it never fails to amaze me how many courier owner drivers and even small courier companies aren’t registered for VAT. With the VAT rate due to increase to 20% in January it seems to me that it’s now essential that everyone in this business gets VAT registered as soon as possible.

How far would you drive to save 20p/litre on fuel costs? How much haggling would you be prepared to do to knock £2,000+ off the cost of a new van? How about all your customers agreeing to increase your rates by 20%? This is what you’re missing out on by not being VAT registered.

Many people seem to be scared of registering for VAT – worried that the paperwork will be too much or that they’ll have VAT inspectors visiting every few weeks maybe. The paperwork is simple, and under the Flat Rate Scheme it’s so simple that it shouldn’t take more than a few minutes every three months to administer.

Using the Flat Rate Scheme you add VAT (currently 17.5%, increasing to 20% in January 2011) to all your invoices (this will make no difference at all to most of your business customers because they can claim the VAT back) and then pay a lower percentage (currently 9%, going up to 10% in January. 1% reduction in the first year in both cases) of the total to HMRC once a quarter.

In case you’re not good with numbers that means (from January) that when you charge £100 for a job you’ll invoice for £120 including VAT and then have to pay £12 (£10.80 in your first year of registration) back to HMRC. That’s 8% of your turnover added straight onto your bottom line profits.

So what about the paperwork? Using the Cash Based Turnover Method of the Flat Rate Scheme you only account for VAT on payments you actually receive – so for many owner-drivers and small courier companies all that’s needed is to sit down once a quarter with your bank statements, add up all the payments you’ve had into your account and multiply the total by the Flat Rate percentage. That’s it. No piles of fuel receipts to sort through, no working out how much VAT you paid on the printer ink you bought with the shopping from Tesco, no messing about. You only claim back the VAT on capital purchases over £2,000 so everything’s made simple for you.

And there’s more good news. Providing you’ve still got the goods and the VAT receipts at the time you register you can claim back the VAT on any goods you bought for your business up to THREE YEARS before your registration date. So that van you paid £12,000 for 2 years ago is now worth a VAT reclaim of nearly £1800 to you. And the VAT on any ‘services’ you’ve paid for in the last 6 months (your CX subs for example) can also be claimed back, as long as the service didn’t relate to goods which you don’t own any more (repairs to a van which you’ve sold on for example) and you’ve still got the receipt.

For businesses which subcontract a lot of work out to VAT registered subcontractors or which rent or lease their vehicles it can be more profitable to pay VAT in the normal way rather than using the Flat Rate Scheme. The paperwork is slightly more complicated but it’s still pretty simple and isn’t really a lot of extra effort added onto your existing responsibility for keeping proper financial records.

Most people have an idea of how standard VAT works I think, but the basics are that you charge vat at 17.5% (20% from Jan) on all the work you carry out. You then owe that 17.5% to HMRC but before paying them you deduct from it any VAT you’ve paid out in connection with your business – so you’re claiming back the VAT you pay out on your fuel, vehicles, subcontractors, phone bill, computer equipment, CX subs etc. If, like most courier businesses, you tend to pay your suppliers before you get paid by your customers you should opt for the ‘Cash Accounting’ method of accounting for VAT – so you only have to pay the VAT to HMRC when you’ve already been paid by your customer and you claim back the VAT you’ve paid to suppliers only when you’ve paid it.

Whichever scheme you opt for, stop handing over your money to the Government for nothing and register for VAT as soon as possible. There’s a bit of a delay in registration and it can make it a bit messy invoicing customers while you’re waiting for your registration to be confirmed (see here) but you can avoid any problems by setting your registration date a couple of months after the date you apply. That way you’ll already have your VAT number by the time you have to start charging your customers VAT.

Do it today.

How to Register for VAT

Flat Rate Scheme for VAT

Cash Accounting Scheme for VAT

Reclaiming VAT on goods you bought before registration

Reclaiming VAT on services you bought before registration

Download the template here (MS Excel template file) or view it as a pdf file here.

Of course you don’t have to invest in a copy of Excel just to produce a few invoices, OpenOffice.org has most of the functionality of Excel (and other MS Office products) and it’s free. The template opens OK in OpenOffice but needs some slight adjustments for page margins and layout etc.

Google Docs allows you to produce invoices and other documents online and export to Excel or OpenOffice if required. They have their own invoice templates available and again it’s all free of charge.

Zoho.com is another online office suite, similar to Google Docs, with a lot more thrown in as well. They have their own dedicated online application for raising invoices invoice.zoho.com but annoyingly they’ve now seem to have started charging for its use.

Microsoft Office Accounting Express is FREE, fully featured, small business accounting software. For a free product it compares very well with the basic versions of Quickbooks and Sage, allowing you to raise and track invoices, enter bills, keep track of what you owe and what you’re owed etc, and did I mention that it’s FREE? It’s even upgradeable to the more advanced Microsoft Office Accounting Professional for about £150 if you find that you’ve outgrown it.

To satisfy HMRC you need to include on your invoice:

The date of issue of the invoice.
A sequential number that uniquely identifies the invoice.
Your business’s name, address and VAT registration number.
The name and address of your customer.
Your customer’s VAT registration number (only if they’re VAT registered in another EU country and you’re invoicing without VAT).
The date of supply of services (the date you did the work).
A description of the services supplied (from a VAT point of view ‘Courier work’ would be OK – your customer may want more detail).
The VAT rate applied (normally 17.5%).
Total amount of VAT payable.
The total amount payable for the whole invoice excluding VAT.
The total amount of VAT charged at each VAT rate (normally just one entry for the 17.5% rate).
The unit price of the services supplied and the number of units charged for – if this is normal practice for your industry (as far as I’m aware it isn’t normal practice in the courier industry) or required by your customer. In practice you can ignore this unless you charge your customer by an agreed price per mile or hour worked AND they’ve asked you to include the figure on your invoice. For example ’200 miles @ 70p/plm’.

To satisfy Companies House and Trading Standards:

If your business trades under a name other that its actual name then you must include the actual name on your invoice, as well as the trading name.

If you’re a sole trader John Smith and you trade as ‘John Smith’, ‘J Smith’ or just ‘Smith’ then that is the only name that needs to appear on your invoice.
If you’re a partnership of John Smith and Alan Jones, and trade under any combination of the names (‘Smith & Jones’, ‘J Smith & Alan Jones’ etc) then those are the only details needed.
If your business is a limited company and it trades under its own name ‘S&J Courier Services Ltd’, then that’s the only name that needs to appear on your invoices.

In any other case, where the business trades under a name that is not its actual name, the full actual name of the legal entity behind the trading name must be shown on all invoices. So if John Smith trades as ‘John Smith Couriers’, or John Smith and Alan Jones trade as ‘J&A Couriers’, or even if S&J Courier Services Ltd trade as ‘S&J Courier Services’, then the actual name of the sole-trader, the partners or the limited company must be shown on the invoice.

To keep you customer happy

The date you did the job.
The collection and delivery details – I prefer the format ‘XYZ Semiconductors, London E14 – ABC Computers, Manchester M30′.
Any reference if you’ve been given one by the customer – otherwise use the name of the person who booked the job.
Any purchase order number supplied by the customer – if it’s the first job you’ve done for them it doesn’t hurt to ring them and ask them what they need to appear on the invoice.
The POD for the job – often not essential with end-users but other transport companies like to get their PODs. Also attach the original hard copy POD to your invoice, KEEP A COPY FOR YOUR OWN RECORDS THOUGH.
Your bank details. – Most companies pay by BACS or internet banking these days. Make the payment process as simple as you can for them and avoid any excuses for late payment.
Invoice promptly – if it’s a one-off job then don’t leave it until the end of the month, do it now.
Invoice accurately – only invoice for the agreed amount. if there are any additions for waiting time, call-outs etc then agree the charges with the customer at the time that the cost is incurred.
Don’t backdate your invoice. If you don’t get round to sending your invoices until the middle of the month then don’t date them at the end of the previous month. Large companies may not notice and you’ll be paid as and when your invoice is cleared, small companies may get annoyed at being presented with an invoice due for payment within a few days of receipt.

To avoid any problems in the future

Spell out your payment terms and the due date on the invoice.
Explain the methods of paying the invoice – “Cheques should be made payable to XYZ Couriers…etc” “BACS payments may be made to Account no……etc”
Don’t mention unreasonable and un-agreed penalties for late payment on your invoice.
Draw the customer’s attention to the Late Payment legislation – “WE UNDERSTAND AND WILL EXERCISE OUR STATUTORY RIGHT TO INTEREST AND COMPENSATION FOR DEBT RECOVERY COSTS UNDER THE LATE PAYMENT LEGISLATION IF WE ARE NOT PAID ACCORDING TO OUR CREDIT TERMS.”
Draw the customer’s attention to your Conditions of Carriage, Conditions of Trading, Terms & Conditions, or whatever “ALL BUSINESS UNDERTAKEN IS SUBJECT TO OUR CONDITIONS OF TRADING – A COPY OF WHICH IS AVAILABLE ON REQUEST – or go to www.quietlyefficientcouriers.co.uk/conditions.pdf” This won’t automatically mean that the job you’re invoicing on this occasion will be covered by those conditions, you should have agreed that in advance, but it will help you show that your Conditions apply to any future work you carry out for the customer.

You must be able to provide receipts showing the VAT for anything that you claim the VAT back on in this way. Be warned that HMRC are very likely to ask to see all the supporting VAT receipts if you put in a big reclaim of VAT on your first VAT return. This is nothing to get worried about as long as you’ve stuck to the rules.

You can claim the VAT back on any ‘goods’ that you’ve purchased up to 3 years before your registration date as long as you still have the goods on the date that your registration starts. ‘Goods’ would include vans, computers, promotional material, uniform, fax, telephones and even the tank full of fuel you bought the night before your registration started.

You can also claim back the VAT on any ‘services’ that you’ve paid for up to 6 months before your registration date as long as the service wasn’t one that you ‘sold on’ before your registration date. So you could claim back the VAT on your accountant’s bill from 5 months ago but you couldn’t claim back the VAT that a subcontractor charged you last week if you’ve invoiced your customer for the job before your registration date. *See below.

The good news is that you can still claim back the VAT on these pre-registration expenses even if you’ve registered under the Flat Rate Scheme (FRS).

Normally under the FRS you can only claim back the VAT on purchases of ‘capital assets’ costing over £2,000 including VAT; so as far as couriers are concerned usually just on the purchase of a van. When claiming the VAT on pre-registration expenses however you can claim back the VAT on all the purchases mentioned above as if you weren’t on the FRS. So if you were to buy your new laptop 2 weeks before you registered for VAT on the FRS then you’d still be able to claim the VAT back on it. If you bought it just after registering for VAT on the FRS you wouldn’t be able to claim the VAT unless it had cost you £1702.13 plus VAT (£2,000) or more.

The only ‘gotcha’ with regards to the FRS is that if/when you sell anything that you’ve claimed the full amount of VAT back on using the above method (your van for instance) you have to account for the VAT on the sale at the normal rate rather than at the FRS rate. So if you’ve bought your van 3 years ago for £8,000 (plus £1,400 VAT) and claimed back the VAT, then when you sell it next year for £1,500 (plus £262.50 VAT) you’ll have to pay HMRC the full £262.50 VAT when you sell it, rather than £135 under the FRS.

Given that you’ll almost certainly be within a year or so of starting your courier business when you decide to register for VAT, it’s certainly worth going back and claiming all that you’re entitled to.

Unless you’ve taken the (sometimes sensible) option of starting your registration on a date in the future you could have a period of 3 months or longer when you’re liable to account for VAT on all your sales but you’re not legally able to charge VAT. This obviously leaves you with a problem.

You’re not legally able to show the VAT as a separate amount on your invoice unless you’ve received confirmation of your VAT registration. HMRC’s solution is for you to issue a VAT-inclusive invoice to your customers. So instead of invoicing £100 you would invoice £117.50 ‘including VAT’. If you’ve got a close relationship with all of your customers and you can get them to agree to this in advance then this is without doubt the best option: please read on however.

Most established companies, particularly in the transport sector, will not pay VAT on an invoice unless it’s a genuine VAT invoice containing a VAT number and the VAT shown as a separate amount. You are not allowed (or able) to supply these details on your invoices until you receive confirmation of you VAT registration. If you use the HMRC approved method above (invoicing inclusive of VAT), without the prior agreement of your customer, you may well find that your customer delays payment of your entire invoice until they receive a proper VAT receipt.

The alternative method of dealing with this problem is to invoice for the normal amount, say £100 using the example above, with a clear notice on the invoice stating that you are awaiting VAT registration and a full VAT invoice showing the outstanding VAT will be issued as soon as your registration is confirmed. This avoids the delay that will almost inevitably be caused if you issue a VAT-inclusive invoice as recommended by HMRC.

Once your VAT registration is confirmed you send them an invoice for the full amount, with the VAT itemised, with a credit shown for the original amount (if that’s already been paid) and just the Vat showing as outstanding. If you’re ONLY invoicing for the outstanding VAT it can be seen as helpful (or at least ‘friendly’) to show the ‘payment due’ date as the last day of your own VAT quarter.

Remember that you can reclaim the VAT on many expenses incurred BEFORE your registration date. I’ll cover that in a future posting.

The claim procedure is straightforward enough but if you’re not used to it then it can be a bit daunting, particularly if the debtor files a defence. Even if you know the procedure it can be simpler and less stressful to pass the debt to solicitors or a collection agency for action.

Direct Route have often been recommended to couriers as the first port of call for debt recovery but there have been mixed reports about their service. Many people report that Thomas Higgins offer a good service and they seem quite open and fair about their pricing. A basic letter before action costs just £2 plus VAT, probably cheaper than doing it yourself. They’ll also collect late payment charges for you.

www.payontime.co.uk/doctor/doctor_main.html

The Late Payment of Commercial Debts (Interest) Act 1998 gives you the right to claim interest and compensation for late payments.

This is a statutory right – your customer doesn’t have to agree to it, you don’t have to inform them in advance that you intend to charge them if they pay late and you are not permitted to agree in advance to waive late payment fees unless a suitable alternative form of late payment penalty is agreed.

For invoices up to £999.99 you can charge £40 PER LATE INVOICE. For invoices of between £1,000.00 and £9,999.99 you can charge £70 PER INVOICE. You can also charge interest on a daily basis, currently at a rate of 13.5% per annum.

You don’t charge VAT on the late payment or the interest and you don’t charge the late payment fee on a recurring basis.

You don’t HAVE to charge the late payment fee but unless you’ve specifically agreed to waive the fee the late payer still owes it to you EVEN AFTER THEY’VE PAID THE ORIGINAL DEBT. The late payment fee is like any other debt – you have up to 6 years to recover it from the late payer and remember that it’s chargeable on EVERY payment received late over that period.

You may find that it’s best to use the threat of the late payment legislation as a tool to get late payers to pay up. For example, our standard collection letter includes:

“As you may be aware, under the Late Payment of Commercial Debts (Interest) Act 1998 we have a statutory right to charge interest on overdue payments. The current rate of interest is 13.5%. We also have a statutory right to charge compensation of between £40 and £100 towards our collection costs. You will notice that your statement includes an invoice for the late payment charges. IF WE RECEIVE PAYMENT OF ALL OTHER OUTSTANDING INVOICES WITHIN 7 DAYS OF THIS LETTER WE WILL NOT PERSUE THESE CHARGES.”

This at least gives the customer the chance to pay up straight away and avoid the extra charges. It’s worth mentioning that if you use this approach and they do pay up within the 7 days then you’ve lost your right to go back within 6 years and claim the late payment charges.

Thomas Higgins solicitors will do the whole thing for you for a small fee. Direct Route are often recommended for business to business debt collection but I’ve heard several reports that they seem unwilling to collect late payment charges.

Example Invoice for Late Payment Charge & Interest

Late Payment Penalties Information Sheet

Overdue account letter – Example 1

Overdue account letter – Example 2

If you base your letter on these then don’t forget to change the interest rate to the current rate – it’s 13.5%pa from 1st January 2008 to 30th June 2008: the current rate is shown in the centre of the page at www.payontime.co.uk.

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.

Since the government haven’t raised the rates since the scheme was introduced in 2002 it’s not quite as beneficial as it once was but it can still be a very tax-efficient, and simple, way of claiming your vehicle expenses under certain circumstances.

It works best for owner-drivers with rented small vans doing very high mileages. 2500 miles per week equals about £650 allowance for £85 rental, £20 insurance & £250 fuel.

If you use the scheme you can’t claim any other expenses for ANY vehicle costs except for hire-purchase interest. You can’t claim fuel or vehicle insurance but you can still claim for congestion charge, tolls, GIT etc.

You have to keep a full, accurate log of your journeys and mileages and be able to prove that you covered all the mileage on business. Records have to be kept for 6 years after the end of the tax year and the Revenue can and do check records randomly.

The allowance is charged to your Profit & Loss account as if it was a normal expense and can do a nice job of decimating your profits for both Income Tax and Tax Credit purposes.