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How To Pay Someone Who Is Not VAT Registered

paying someone who is not vat registered

If you need to pay a business that is not registered for value added tax (VAT), you must calculate and pay the VAT yourself at the standard 20% rate. This applies to any goods or services that you purchase from a non-VAT registered company operating in the UK. By paying the VAT yourself, you can then reclaim that amount from HM Revenue and Customs (HMRC) if you are VAT registered.

Here are the key steps for properly paying someone who is not VAT registered.

  • Get a VAT invoice from the supplier: The business you are purchasing from should provide an invoice with their VAT registration number. Otherwise, you will have to calculate and pay the VAT yourself.
  • Calculate the VAT: The process to determine this type of VAT is to calculate 20% of the total amount on the invoice.
  • Reclaim the VAT paid: This is only possible if you are already registered with VAT as an individual. Registered payers can keep all the invoices of personally paid VAT to later reclaim the VAT amount.
  • Liability for fine from HMRC: Individuals who fail to pay VAT on their purchases become liable for a fine from HMRC. That might be through interests on the owed VAT.

Understand that VAT might not be required when making payments for goods or services from another EU country. It is expected that you confirm the tax regulations in that particular country.

SectionKey Points
Paying a Non-VAT Registered Company
  • Obtain a VAT invoice.
  • Calculate 20% of the total bill for the goods or services.
  • Pay that amount as VAT.
  • Reclaim the VAT if you are VAT registered.
  • Potential penalties for non-compliance.
Being VAT Registered
  • Obligatory for businesses with a taxable turnover > £85,000.
  • Voluntary for businesses with a turnover below this threshold.
  • Allows reclaiming VAT on purchases.
  • Enhances reputation and cash flow.
VAT Registration Process
  • Online registration via HMRC.
  • Must register by the 20th of the month following the turnover threshold breach.
VAT Registration Schemes
  • Annual Accounting Scheme.
  • Cash Accounting Scheme.
  • Flat Rate Scheme.
Charging VAT
  • Standard rate at 20%.
  • VAT must be clearly stated on invoices.
  • Fines for non-compliance.
Paying VAT
  • Payment frequency varies by scheme.
  • Direct debit payment option.
  • Penalties for late payments or non-compliance.
HMRC Penalties for VAT Errors
  • Fines for late returns or payments.
  • Severe penalties for fraud or evasion.
Professional VAT Advice
  • Accountants, tax lawyers, and HMRC can provide guidance.
  • Importance of choosing a trusted and experienced advisor.

Check out our other article to understand the pros and cons of being vat registered

What Does Being VAT Registered Mean?

VAT is the purchase tax levied on certain goods and services in the UK. Businesses that are VT registered must include a VAT charge to the price of every product they sell. The standard VAT rate is presently 20% of the total invoice amount. However, there are exceptions for some “zero-rated” items – products that have a 0% VAT fee. These include goods like food and drinks.

Find out more in this video:

What happens to a business without VAT registration? The buyer calculates 20% of the overall cost as VAT. The general expectation is that businesses with a taxable turnover that exceeds £85,000 per year must register for VAT. Only businesses with a lesser annual turnover are exempted but could still register voluntarily.

Who needs to Register?

Registration for VAT must follow the stated regulations of HMRC. The minimum conditions to become registered for VAT include proof of providing taxable goods or services in the UK. HMRC also has certain criteria for turnovers. VAT registration is important for those businesses that exceed the £85,000 annual threshold. This amount is calculated by summing up your total sales without including VAT charges.

Voluntary VAT registration is also available for businesses below the £85,000 per annum threshold. It is an excellent idea for those companies that think their turnover is likely to soon increase. Paying VAT makes such businesses eligible to reclaim taxes they made on purchases.

Consult an accountant or tax lawyer if unsure about the benefits of voluntarily registering for VAT. They can guide you on the best practices to stay compliant and make the best decision for your business.

What are the Benefits of Being VAT Registered?

The most important benefit enjoyed by VAT-registered companies is the boost to their business reputation. Many customers prefer VAT registered companies and trust them over the unregistered ones. This is particularly a common criterion if the business is selling high-value products.

The eligibility to reclaim VAT paid on purchases is another benefit of registering for VAT. The cash back can serve as additional funds to reinvest in your business. Being registered for VAT also increases your company’s cash flow since most customs pay upfront VAT for goods and services they purchase. It indicates you will likely always have cash before it is time to pay suppliers.

How to Register for VAT

Registration for VAT is an easy process anyone can do themselves. Go online to the HMRC website and fill out the form requesting your details. That includes the business name, address and contact information. You also need to submit your bank details to set up a link for direct debit payment.

The deadline for VAT registration is the 20th of the month when you exceed the £85,000 per annum turnover. Imagine a business whose turnover exceeded the £85,000 threshold on the 15th of March. That company will have to register for VAT before the 20th of April. Failing to complete your registration before the deadline could result in penalties from HMRC.

The Three VAT Registration Schemes

There are three different VAT schemes available during the registration process. We have the annual accounting scheme, the cash accounting scheme and the flat rate scheme. Choosing the best of these schemes is dependent on your specific business structure and turnover.

The simplest scheme is the annual accounting scheme since it requires only two payments to HMRC every year. The first payment deadline is due at the end of your VAT quarter while the other payment is scheduled for the end of the financial year. The annual accounting scheme is more suitable for businesses with low turnover because it helps to reduce their cash flow.

The next VAT registration scheme is cash accounting which is similar to the annual accounting scheme. However, payment is more regular this time around. Cash accounting requires you to pay VAT on your goods and services after you receive payment from the customer. It is a helpful strategy for situations where the customer pays late. This VAT model is preferred by those businesses with a high turnover because of how it helps to improve cash flow.

Lastly, we have the flat rate scheme with a unique VAT payment method. This scheme charges a flat VAT fee on the sale of every goods and services in your business. The obvious advantage is that it makes bookkeeping easier since VAT calculations are similar. However, a fixed VAT rate for every sale indicates you might pay more VAT in the long run compared to other schemes. The flat rate scheme is the most popular choice for businesses with high turnovers.

How to Charge VAT

Learn how to charge VAT on the sale of all taxable goods and services you provide. Registered businesses can calculate their tax by taking 20% of the prices of goods sold to the customer. Your invoice should also contain a breakdown of the VAT. failure to charge VAT on the invoice of all taxable goods attracts a fine from HMRC.

How to Pay VAT

VAT payment is a simplified process provided you keep to regular deadlines. As a registered VAT business, the frequency of your tax payments depends on your VAT registration scheme.

Companies under the annual accounting scheme make payments twice a year while the cash accounting scheme requests VAT payments per completed purchase. The flat rate scheme is totally different from both and uses a quarterly payment arrangement to HMRC.

You can choose to complete the VAT payments either online or through post. HMRC also provides a simple method for companies that set up a direct debit system. It is a safe approach since the money is deducted automatically on the due date from the business bank account to HMRC. The criteria is to always leave enough money to cover the payment and there will be no worries about VAT deadlines.

Understand that HMRC reserves the right to charge you interest or fines for late payments. The penalty could be up to 100% of the owed tax amount to discourage businesses from paying their taxes after stipulated deadlines. It is always recommended to contact HMRC if you think there might be a delay with your VAT payment or if you have less than the total VAT owed. HMRC might extend the deadline for you if your excuse is acceptable to them.

HMRC Penalties for Different VAT Errors

VAT-related fines or penalties are different depending on the specific error. The most common issue is late filing of tax returns which could be up to £100 fine or more. Failure to pay stipulated fines would result in more severe penalties.

Another popular problem is late VAT payments. The HMRC penalty for failing to pay before the deadline might amount to 20% of the owed tax. Additionally, HMRC can charge interest on the unpaid tax. Failure to pay stated fines or interests automatically results in further sanctions.

More serious compliance issues with HMRC are those related to fraud or tax evasion. These are criminal charges with possible prison sentences for guilty individuals or businesses. Ignorance is never an excuse and those guilty of VAT fraud might be liable to fines as much as 100% of the total tax owed.

Who Can Advise You on VAT

Some business owners struggle to combine business management and tracking of the correct tax amount to pay. We recommend seeking professional help if you fall in this category. Moreover, tax laws are constantly changing and having expert help is not a bad idea.

There are three main types of professionals to consider for VAT-related issues: an accountant, a tax lawyer and HMRC.

  1. Talk to an accountant if you have problems with understanding the VAT regulations. You can negotiate a fee for the person to prepare and file VAT returns on your behalf. Note that mistakes with VAT returns attract fines, so having some professional help is great.
  2. A tax lawyer is important when you need specialist advice on a tax-related issue. For example, if you are charged to court for VAT fraud or evasion. A tax lawyer can represent you in such a situation. There are serious penalties for these tax fraud or evasion crimes and you need the best expert advice.
  3. Contact HMRC for information and guidance on tax regulations you do not understand. HMRC is available through phone, post or online channels.

We recommend going to a professional for assistance relating to VAT problems. You need all the experience available to avoid compliance issues. You might also consider reaching out to more than one professional if you need assurance on a critical decision-making process.

Final Thoughts

Paying a non-VAT registered company requires some extra steps but it’s important to follow the rules to avoid penalties from HMRC. By calculating and paying the 20% VAT yourself, then reclaiming it if you are VAT registered, you can stay compliant while working with suppliers of all sizes.

If you have any doubts about the process,consult an accountant or tax professional to ensure you are handling VAT payments correctly. Proper record keeping and understanding of the regulations will keep your business in good standing with HMRC.


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