Top tips on how to tackle tax
Long supply chains mean navigating VAT successfully can be a challenge for electrical business – here’s our advice on getting it right
Are you registered?
VAT registration is mandatory if your taxable turnover exceeds the new threshold of £90,000 from 1 April 2024. However, you can also register voluntarily if your turnover is below this threshold, which can be beneficial for reclaiming VAT on business expenses. This can be particularly useful for electrical businesses purchasing significant amounts of equipment and materials.
Not always 20%
The electrical industry uses a myriad of products and services so you must stay vigilant in determining the correct VAT liability of your supplies.
Most electrical work is subject to the standard rate of 20%, however, certain energy-saving products and installations may qualify for a reduced rate of 5%.
It’s essential to identify the correct VAT rate for your services to avoid overcharging customers or underpaying HMRC. If you get it wrong, HMRC can raise assessments going back up to four years.
Track everything
No matter how many transactions you carry out, keeping accurate records of sales and purchases is essential. Once registered, you must submit VAT returns, usually quarterly, detailing your output VAT, i.e. charged on sales, and input VAT, i.e. paid on purchases. The difference between these amounts is what you will either pay to or reclaim from HMRC.
Small businesses that have a taxable turnover below £1.35 million can take advantage of various VAT schemes offered by HMRC, such as the Flat Rate Scheme, which simplifies the calculation process, or the Cash Accounting Scheme, which can aid cashflow by only accounting for VATon payments made and received rather than on an invoice basis. Remember, VAT must be accounted for on deposits or progress payments received, not just upon invoicing. Issues like this can lead to non-compliance penalties.
For continuous supplies of services made to customers, businesses may use a ‘request for payment’ rather than issue a tax invoice. This request will not create a tax point, and the procedure therefore delays the requirement to account for VAT until the payment is received.
Digital from end-to-end
Since April 2022, all VAT-registered businesses must comply with Making Tax Digital (MTD) for VAT, which is a key part of the UK Government’s plan to make it easier for businesses to stay on top of their tax affairs.
“It’s essential to identify the correct VAT rate for your services to avoid overcharging customers or underpaying HMRC. If you get it wrong, HMRC can raise assessments going back four years”
MTD mandates the use of digital record-keeping, the submission of VAT returns using compatible software, using digital links and the use of checking functions, which all aim to reduce errors and increase efficiency.
Domestic reverse charge (DRC) for construction services
The DRC is a VAT procedure that shifts the responsibility for accounting for VAT on certain construction services from the seller to the buyer.
It is designed to combat VAT fraud, particularly in industries like construction, where the supply chain can be complex and susceptible to fraudulent activities.
Under the DRC, when qualifying services falling within the construction industry scheme (CIS) are supplied both from and to a VAT and CIS-registered business, the supplier does not charge VAT unless the recipient declares that they are an ‘end user’. Instead, the recipient of the services accounts for the VAT on their VAT return. It’s crucial to understand when the DRC applies and ensure your systems and staff can handle it correctly.
Trading internationally
Businesses providing services to customers outside the UK need to determine where the place of supply is and whether UK VAT should be charged, or if the supply creates other registration obligations in the other country.
This is not just a matter of following UK regulations; it’s about understanding the global VAT landscape. Getting it right can prevent double taxation or non-taxation, ensuring the correct treatment is followed and penalties are avoided.
Importing goods into the UK requires businesses to account for VAT. This involves paying VAT at the point of import and then potentially reclaiming it on your VAT return, subject to normal rules.
It’s crucial to keep accurate records and understand the specific VAT rates that apply to imported goods. There are also simplifications such as Postponed Import VAT Accounting (PIVA) which can improve cashflow. Businesses moving goods to and from Northern Ireland should consider the Northern Ireland Protocol for VAT, particularly if the goods are en route to the Republic of Ireland.
Dealing with HMRC
Dealing with VAT inspections can be daunting, but they are a standard part of business operations. To prepare, ensure your VAT records are accurate and up to date, including keeping detailed invoices for all transactions, both sales and purchases.
If discrepancies are found during an inspection, it’s important to address them promptly and to co-operate fully with HMRC to minimise the risk of penalties arising.
Getting expert help
BDO offers a comprehensive range of VAT services to support your business, from VAT compliance, health checks and training to advising on automating your VAT systems, helping with international VAT issues and resolving disputes with HMRC. The team is committed to providing clear, practical advice that adds real value to your business. Find out more at www.bdo.co.uk
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