by Eunice | May 24, 2023 | European VAT
What is the traditional EU VAT system?
If you are selling goods to customers in multiple countries in the EU, which is likely the case if you are an e-commerce seller, you have no choice but to register for VAT in each country you have customers and file separate VAT returns.
This is how the traditional EU VAT system worked. Imagine the hassle and headache it can bring for small business owners.
But thanks to OSS, or One-Stop-Shop, a simplified VAT system made possible by the EU on July 1, 2021, the VAT compliance process for businesses that sell goods and services online to customers in other EU member states has been easier than before.
What is OSS, and how does it work?
With the tedious process under the traditional VAT system, it is undoubtedly a relief to use OSS since you are only required to register for VAT in a single EU member state and then file a single VAT return for all your EU sales.
As a result, if you sell goods to customers in different EU countries, you no longer need to register for VAT in each country.
However, remember that not all sales can be processed under OSS VAT. Only sales of goods and services to customers in other EU member states can be filed through OSS, and sales to customers outside the EU or your home country are subject to the traditional VAT rules.
What Can E-Commerce Sellers Do?
It is truly a game-changer for e-commerce sellers to use the OSS VAT system when complying with VAT regulations. To improve your VAT compliance through OSS, remember the following essential steps:
Register for VAT in a single EU member state
Before availing yourself of the OSS VAT system for your e-commerce business, you will first register for VAT in a single EU member state where you have a fixed establishment, such as a warehouse or office.
Collect the correct VAT rate from your customers
Collection of VAT is done upon sale with the applicable VAT rate. Keep in mind that the VAT rate will depend on the country where your customer is located.
Report and remit the VAT due on your sales
You can use the OSS VAT system to file sales to customers in other EU member states instead of having multiple VAT returns. You need to file a single VAT return for all your EU sales and pay the VAT due to the tax authority in the member state where you are registered for OSS VAT.
To further guide you on your VAT compliance, you can seek professional tax advice from an accountant. They will help you navigate the complex VAT rules and regulations that apply to your business and ensure that you are compliant with all relevant requirements.
Frequently Asked Questions
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Do I still need to comply with local VAT rules in each country where I have sales?
This is a common question that many e-commerce sellers have when it comes to the OSS VAT system.
The good news is that if you are registered for the OSS VAT system and have already reported and remitted VAT on your EU sales using the system, you no longer need to comply with local VAT rules in each country.
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Can I claim input VAT through the OSS system?
Unfortunately, the answer is no – you cannot claim input VAT. The OSS system only accommodates reporting and remitting the VAT you collect on your sales to customers in other EU member states.
If you purchase goods or services for your business, you can only claim input VAT in the member state where you are established for VAT purposes (i.e., the country of origin of your business).
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How does OSS differ from IOSS?
The main difference between the IOSS and OSS schemes is the type of goods to which they apply.
The IOSS scheme applies to distance sales of low-value goods imported into the EU. In contrast, the OSS scheme applies to sales of goods and services supplied within the EU, whether they are distance sales or not.
As an e-commerce seller, you should understand the differences between the IOSS and OSS schemes and choose the most appropriate for your business needs.
If you sell low-value goods imported into the EU, the IOSS scheme may be your best option. On the other hand, the OSS scheme may be more suitable if you sell a wide range of goods and services within the EU.
Conclusion
OSS VAT system is a great tool for e-commerce and Amazon FBA sellers who sell goods and services to customers in other EU member states. We hope this blog can help you comply with EU VAT regulations.
You can always seek professional advice from Sterlinx Global for specific guidance on your VAT compliance.
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by Eunice | May 19, 2023 | European VAT
Sole Traders VAT: Why get registered?
VAT, or Value-Added Tax, is a tax that is added to the price of most goods and services.
As a business owner, you may charge VAT on the products or services you sell and then pay this VAT to HM Revenue & Customs (HMRC) after deducting any VAT you have spent on your business expenses.
The VAT threshold in the UK is currently £85,000 (as of 2023), which means that if your business turnover exceeds this amount in 12 months, you must register for VAT.
There are some benefits to becoming VAT registered as a sole trader, including:
Greater credibility
Being VAT registered can make your business look more professional and established, which can help to build trust with customers and suppliers.
Claiming back VAT
If you’re VAT registered, you can claim back the VAT you’ve paid on your business expenses, and this can reduce your VAT liability and improve your cash flow.
Competitive advantage
If your competitors are VAT registered, not being registered may put you at a disadvantage. Registering for VAT can level the playing field and potentially increase your sales.
How to become VAT registered?
If you need to become VAT registered, the process is straightforward. Here are the steps you’ll need to take:
1. Check if you need to register
As mentioned, if your business turnover exceeds £85,000 in 12 months, you must register for VAT. If your turnover is below this threshold, registration is optional, but you may still choose to do so if it makes financial sense for your business.
2. Gather information
Before registering, you’ll need to gather information about your business, including your VAT taxable turnover, business bank account details, and business activity information.
3. Register online
You can register for VAT online through the HMRC website, and you must create a VAT online account and complete the online registration form.
In addition, you also need to provide your business details, including your trading name, address, and contact details.
4. Wait for confirmation
After you’ve submitted your registration, you’ll receive a confirmation from HMRC within a few weeks. Once you’ve received confirmation, you can start charging your goods and services VAT.
What are the obligations of being VAT registered?
Once you’re VAT registered, there are certain obligations you’ll need to fulfill:
Charge VAT
As a VAT-registered business, you are required to charge VAT on the goods and services you sell. This VAT amount needs to be included on the invoices you issue to your customers.
It’s important to understand the VAT rules and regulations around when and how to charge VAT to ensure that you’re charging the correct amount.
Submit VAT returns
It’s mandatory for VAT-registered businesses to submit VAT returns to HMRC every quarter. These VAT returns provide details of your VAT sales and purchases during that period. You’ll need to pay any VAT due to HMRC by the deadline specified in the return.
Keep accurate records
For at least six years, it’s important to maintain accurate records of all your VAT transactions, including invoices, receipts, and any adjustments made to VAT. These records should be easily accessible and available for inspection by HMRC.
Comply with VAT rules
As a VAT-registered business, you must comply with the VAT rules and regulations set out by HMRC, including VAT rates and exemptions, and ensure you charge the correct amount of VAT on your goods and services.
In addition, it’s important to keep up-to-date with any changes to the VAT rules that may affect your business.
Frequently Asked Questions
What if my business turnover is close to the VAT threshold?
Consider registering for VAT voluntarily if your business turnover is near the VAT threshold. This can help you avoid penalties for late registration and give time to adjust to the new requirements.
Although remember that once you register, you’ll need to start charging VAT on your sales and filing VAT returns, so factor in the extra time and effort required.
What happens if I don’t comply with VAT regulations?
It depends on the severity of your non-compliance. For late filing and payment, you may pay interest and penalties. For errors or omissions on your VAT returns or records, HMRC can investigate and potentially take legal action against you.
In severe cases like deliberate fraud or evasion, you could face criminal charges, fines, and even imprisonment.
How can I keep track of my VAT records and returns?
This task can be a headache, but plenty of tools and resources are available to help you.
Essentially, you need to maintain records of your sales and purchases to aid in calculating output and input VAT. Tools like the VAT online account and third-party accounting software can ease all these.
However, you must choose reputable tools compatible with HMRC’s systems.
Conclusion
Becoming VAT registered as a sole trader can give your business credibility, tax benefits, and competitive advantage. If your business turnover exceeds the VAT threshold, you must register for VAT, and if it doesn’t, you may still opt to register if you think it is beneficial.
Check out Sterlinx Global for more professional advice on Sole Traders VAT.
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by Eunice | May 15, 2023 | European VAT
What you need to know for your VAT-registered business
Value Added Tax (VAT) is a complex and ever-changing business aspect. As a VAT-registered business owner, you must comply with VAT regulations by HMRC (HM Revenue & Customs).
But as we all know, managing the ins and outs of VAT can be a tedious task, especially if you are just a newly VAT-registered business. So, in this blog, we will explain what you need to know about VAT.
After reading, you should comprehensively understand VAT and the essential knowledge needed to navigate it effectively. Whether you are just starting or need a refresher, read on as we dive deep into VAT for business.
When to charge customers for VAT?
You must charge your customers VAT for every sale of goods or services. The VAT rate to be applied depends on the type of product or services you are selling, and we will discuss further the applicable VAT rates for different goods and services.
For charging VAT on your sale, you must provide your customers with a detailed price breakdown so they know precisely what they are paying for.
When to claim back paid VAT?
To lower your VAT liability, which is the total amount you collected from customers or Output VAT, you can claim back the VAT you paid on your purchases by declaring it to your VAT return. This claimable amount is also called Input VAT.
Generally, your purchases and expenses can be counted as input VAT if:
- You have a valid VAT invoice for the purchase
- The purchase was made for business purposes and not personal use
- The purchase is eligible for VAT reclaims (not all goods and services are eligible).
What goods and services are subject to VAT, and what are the current VAT rates?
The rules around what goods and services are subject to VAT can be complex, so you need to understand the guidelines set out by HMRC.
But we will make it easier and comprehensively explain the different VAT rates and what goods and services fall under each.
Standard Rate
The standard VAT rate is currently at 20% and applies to most goods and services not qualified for reduced or zero-rate VAT and are not exempt. Some examples of items charged with a 20% standard VAT rate are:
- Electronic goods such as laptops, smartphones, and tablets
- Household appliances like television, washing machine, and refrigerator
- Furniture items like sofas, mattresses, and tables
- Clothing items for adults, examples are suits, dresses, and sweaters
- Vehicles like cars, vans, and trucks
- Building materials, including bricks, cement, and tiles
- Printing and advertising services like brochure design and printing, advertising campaigns, and billboards
- Consulting and accounting services like legal advice, financial planning, and tax services
- Hospitality services such as hotel accommodation, restaurant meals, and alcoholic drinks
- Sports and leisure services like gym memberships, swimming pools, and golf courses
- Entertainment services, including cinema tickets, concert tickets, and theatre performances.
Reduced Rate
The reduced VAT rate of 5% applies to specific goods and services deemed essential, beneficial, or energy-saving. Here are some examples that are eligible for this rate:
- Women’s sanitary products like tampons and sanitary towels
- Mobility aids such as wheelchairs and crutches
- Children’s car seats and booster seats
- Domestic fuel and power such as gas, electricity, and heating oil
- Energy-saving products such as solar panels, wind turbines, and insulation materials
- Protective equipment such as helmets, safety boots, and high-visibility clothing
- Medical and sanitary products such as contraceptive devices, nicotine patches, and incontinence products
- Installations of energy-saving materials such as double glazing, boilers, and draught-stripping
Zero-Rated
Zero-rated goods and services are considered taxable by the government, but they are currently subject to a 0% VAT rate.
This rate is applied to certain goods and services to provide relief to consumers and businesses who may otherwise face a significant financial burden; that is why you may notice that the listed items below are mostly essential needs:
- Basic food items like bread, milk, and vegetables
- Books, newspapers, and magazines
- Children’s clothing and footwear
- Prescription medicines and medical equipment
- Supplies of equipment to disabled people
- Exports to countries outside the EU
- Construction services for new residential buildings and certain conversions of existing buildings
- Public transport services such as buses, trains, and trams.
VAT registered businesses: VAT Exempted Goods and Services
VAT-exempt goods and services in the UK are not subject to VAT. Businesses that supply/provide purely exempt products/services should not be registered with VAT as they will not pay nor claim back VAT in the first place.
Here are some examples of VAT-exempt goods and services:
- Education and training services provided by eligible bodies, such as universities, colleges, and schools
- Health services provided by doctors, dentists, and other medical professionals
- Insurance and finance services, including specific financial transactions and services provided by insurance companies
- Postal services provided by Royal Mail
- Some types of land and property transactions, including the sale or lease of land and some types of property rental
- Betting, gaming, and lotteries, including the National Lottery
- Certain types of cultural and artistic events, including exhibitions, concerts, and performances
Frequently Asked Questions
How to claim input VAT if I sell a mix of taxable and exempt supplies?
If this is the case, you can only claim a portion of your input tax. To know how much it is, you need to identify what purchases you have made to produce taxable supplies or render taxable services.
Can I claim back VAT on purchases made before I registered for VAT?
Yes, you
by Eunice | May 11, 2023 | European VAT
Top 10 Reasons Why You Need VAT Registration for Your Business
As an entrepreneur, you might have heard about VAT, Value Added Tax. VAT is a consumption tax that is added to the price of goods and services at each stage of production and distribution.
In the UK, depending on the scale of the business, you are either required to register for VAT or opt to do so voluntarily.
Now, why do you need to bother with registering for VAT? After all, it seems like just another bureaucratic hassle to deal with. But registering for VAT can benefit your business in several ways.
In this blog, we will share the top 10 reasons why you need to consider registering for VAT and why it is less overwhelming a process than it may seem. So, let’s dive in!
1. Exceeded the threshold
If your business has a turnover of over £85,000 per year, you must register for VAT.
This is on top of our list since you do not have a choice. But for the following reasons, we will talk about the benefits of opting for VAT registration, despite still needing to meet the threshold.
2. Prepare for growth
If you believe your business will grow in the future, even if you have yet to be at the threshold, you can still register voluntarily to help you avoid penalties for not registering when you should have.
In addition, registering for VAT can help you make strategic decisions about your business operations and investments and prepare for potential changes in tax regulations or business conditions.
3. Claim back VAT on operational expenses
Usually, when you purchase goods or services for your business, the price includes VAT. But if you are registered for VAT, you can claim back the VAT you have paid on these business expenses.
This can help you reduce your costs and improve your cash flow, especially if you are a small business or just starting. That is a very compelling reason for VAT registration.
4. Impression of legitimacy and large-scale
Having a VAT number gives your business an air of legitimacy, which can help you attract customers and suppliers. It shows you are serious about your business and registered with HM Revenue & Customs (HMRC).
Furthermore, being VAT-registered, your business partners may perceive you as a large-scale business, even though you may not. This is because a VAT number is usually only obtained once the high turnover threshold is exceeded.
5. Competitive advantage
If your competitors are registered for VAT, it may be advantageous for you to do the same. It can make your prices more attractive to customers who can claim back the VAT and help you compete for contracts and tenders.
6. Enhance customer relationship
With the help of VAT registration, you can provide a transparent pricing structure for your customers through a VAT invoice with a clearly stated amount of VAT. You can build stronger relationships with your customers with the trust you can gain from them.
7. Build credibility with suppliers and other business partners
VAT registration can help you build relationships with suppliers and other business partners as it demonstrates that your business is serious and professional.
Most suppliers and vendors have a preference for businesses that have already registered for VAT, and they may choose to work with them instead of non-VAT registered, as it signals legitimacy and financial stability.
If you are a VAT-registered business, you may be more favoured by the vendors, and you can assure your customers and other stakeholders.
8. Recover VAT on capital assets
When you purchase a capital asset, you must also pay VAT on top of the price. However, if you are registered for VAT, you can claim back the VAT paid on capital assets, which can help reduce the overall cost of the asset.
To claim back VAT on capital assets, you must ensure that the assets are used for business purposes and that the VAT was paid on a valid VAT invoice.
You must also retain the invoice and other documentation as proof of the purchase and VAT payment.
9. Protect against fraud
Registering for Value Added Tax (VAT) can effectively protect your business against fraud and other financial risks.
VAT registration means you must maintain accurate and detailed records of all sales and purchases of your company, including the amount of VAT charged or paid, which can be invaluable in detecting and preventing fraudulent activity.
In addition, when you are VAT-registered, you can verify the VAT registration status of other partner businesses and ensure that you are only doing business with legitimate companies also registered for VAT.
10. Access to government tenders
By registering for VAT, you may access a broader range of tenders and contracts, as many government tenders require businesses to be VAT registered to be eligible to bid.
If you have plans to expand your business into the public sector, it may be more necessary for your business to obtain VAT registration.
Frequently Asked Questions
How do I register for VAT?
You can register for VAT online through HM Revenue & Customs (HMRC) or by completing a VAT registration form and submitting it to HMRC by post.
How often do I need to submit VAT returns?
If you are VAT-registered, you must submit VAT returns to HMRC regularly (usually quarterly) to report your VAT liabilities and payments.
What happens if I need to correct an entry on my VAT return?
If you make a mistake on your VAT return, correcting it as soon as possible is the best solution by submitting an amended return or contacting HMRC. You may face penalties or fines depending on the nature of the mistake.
Conclusion
VAT registration can bring many benefits to your business, from reducing costs to improving credibility. While it is not mandatory for all businesses, it is worth considering if you want to grow and compete in today’s business world.
If you are still determining whether to register for VAT or have any other tax-related questions, check out Sterlinx Global for personalised advice and guidance.
by Eunice | May 7, 2023 | UK Accounting
Salary or Drawings: Which Payment Structure is Right for You?
The first decision you need to make when it comes to paying yourself is whether to do it through a salary or drawings. Both options have pros and cons, but the best choice will depend on you.
If you choose to pay yourself through a salary, you must register as an employer with HMRC and set up a PAYE scheme. This can be a bit of a hassle, but it offers some advantages.
For example, it can help you budget more effectively because you’ll know precisely how much you’re getting paid monthly.
On the other hand, taking drawings from your business’ profits can be an easier option. You can take out money whenever needed without worrying about setting up a PAYE scheme or following complex rules and regulations.
However, it’s important to note that taking drawings doesn’t provide the same level of protection as a salary. If your business runs into financial trouble, your personal finances could be at risk.
Sole Traders: How to Pay Yourself Through a Salary
If you’ve decided that paying yourself through a salary is the right option for you, here’s a step-by-step guide on how to do it:
Step 1: Register as an Employer with HMRC
Before you can set up a PAYE scheme, you’ll need to register as an employer with HMRC. This process is straightforward and can be done online via the HMRC website.
Step 2: Set Up a PAYE Scheme
Once you register as an employer, you need to set up a PAYE scheme. This involves choosing payroll software or outsourcing to a payroll provider, setting up a PAYE reference number, and deciding on a payment frequency.
This can be beneficial if you have several employees aside from yourself, but if you are the only one handling your business functions, this can be cumbersome and not worth undergoing.
Step 3: Calculate Your Salary
You’ll need to decide on a reasonable salary based on your business’ profits. This should take into account your personal tax allowances and any other possible income.
Step 4: Process Your Payroll
Now that you’ve got your PAYE scheme set up and your salary calculated, it’s time to process your payroll.
This involves running payroll software or working with your payroll provider to ensure you are paid your correct salary, and all the necessary tax and National Insurance contributions are deducted.
Step 5: Record Your Salaries
You must keep accurate records of all your business transactions, including salary payments. This will help you stay on top of your finances and bookkeeping and ensure you’re paying the correct amount of tax.
How to Pay Yourself Through Drawings?
If you assessed that it is difficult to set up the PAYE scheme and resort to drawings as your personal payment structure, follow these next steps:
Step 1: Calculate Your Profit
To determine how much you can afford to take in drawings, you’ll need to calculate your business’s profit. To do this, you’ll need to subtract your business expenses from your business income. The remaining amount is your profit.
Step 2: Decide on a Drawing Schedule
With drawings, you can take out money whenever you need it. However, a schedule ensures you’re not taking out more money than your business can afford.
Consider creating a budget and sticking to a regular drawing schedule.
Step 3: Record Your Drawings
Make sure to record all your drawings. This will be essential in maintaining the accurate accounting of your business transactions and proper payment of taxes.
Step 4: Set Aside Money for Taxes and Other Business Funds
Remember that as a sole trader, you’ll need to pay taxes on your profits. It’s important to set aside money from your before-tax income to cover your tax obligations.
In addition, it’s essential to have an emergency fund in case unexpected expenses arise or your business experiences a downturn. This will give you peace of mind and financial security during difficult times.
Finally, having funds for expanding your business is also an important factor to consider when paying yourself as a sole trader. If you have plans for expansion, you should set aside resources to materialise these wishes.
And while it can be tempting to withdraw the funds for personal use, it’s crucial to resist this temptation. This will allow you to invest in the growth of your business and increase your income in the long run.
Frequently Asked Questions
How can I pay taxes if I also have other income sources?
You must complete your self-assessment tax return yearly to report your income to HMRC. This includes not just your income as a sole trader but also any salary, dividends, or other income you have received as an individual.
It is important to keep accurate records of your income and expenses throughout the year to make this process easier.
Can I take money out of my business whenever I like?
If you choose to pay yourself through salary, then the answer is no, since salary is usually set up periodically, unless you take cash advances which might complicate your records and possibly defeat the purpose of your scheme.
However, if you choose to take drawings, you can take money out whenever you need it, as long as your business can afford it.
