Franchise Finance: VAT – Are you paying too much?
Carl Reader, Dennis & Turnbull Ltd
I often find that many franchisees are paying more VAT than they should be. Sometimes this is due to them not using the most efficient scheme for their business, and in other cases, it is simply down to poor advice.
If you are providing supplies to the end consumer, VAT is ultimately an additional cost to your business and as such, you should consider the following:-
Flat Rate VAT
If you are operating a small business, it may be advantageous for you to consider the flat rate scheme for VAT. HM Revenue & Customs have published a list of flat rates that can be applied to your turnover rather than using the standard rate of VAT. As this list is industry specific, you might find that the industry standard flat rate for your franchised operation is a lower effective rate than the amount that you are paying at present. In these cases it would be potentially advisable to register under the flat rate scheme.
Caution should be taken as the flat rate is applied to the total supplies of any taxable person, so you should consult your adviser in relation to this. For example, if you run your franchise as a sole trade, and also have a buy to let property in your own name, you might inadvertently pay over flat rate VAT on both streams of income.
Exemptions
It might sound simple, however it is worthwhile confirming whether there are any exemptions that apply to the supplies you are making. As an example, we have reclaimed over £100,000 in respect of a sole trader who had incorrectly paid VAT on private tuition supplies. It could be worthwhile reviewing the list of exempt supplies available here to ensure that you are applying VAT correctly to your supplies.
Cash or Standard Accounting
Smaller franchisees are entitled to use the cash accounting scheme rather than the standard accounting scheme. By using this method, franchisees can improve their cash flow as the VAT is only paid based on output and input VAT paid and received, rather than invoiced. Please note that this is not always the most efficient method, and sometimes standard accounting can be more beneficial to a business owner. A typical example of this would be where the input tax due on creditors is significantly higher than the output tax due on debtors. In these circumstances, a franchisee can use standard accounting to their advantage.
Voluntary Registration
If you primarily make supplies to businesses rather than the end consumer, it might be worthwhile registering voluntarily if your supplies are below the registration threshold. Voluntary registration will allow you to reclaim Input VAT on your purchases, and the VAT you charge on sales will be no additional costs to your customer. VAT registration also ensures that you are perceived as a larger business.
Carl Reader is the head of franchising at franchise accountants Dennis & Turnbull, a leading firm of accountants in the franchise industry.
The above information is provided as general advice and no liability is accepted by the author, Dennis & Turnbull or Select Your Franchise in respect of individuals or businesses acting on the above. Independent advice should be sought in all circumstances.
Tags: accounting, carl reader, franchise, vat
