Value Added Tax – or VAT as it is universally known – was introduced in the UK in 1973 as part and parcel of its admission to the European Union.
Now that the UK government is negotiating an exit from the EU, it might be fair to ask about the future of a tax that is founded very much on European principles. However, it is also clear that the UK has been going very much its own way as far as VAT is concerned – and a clear illustration is given by the fact that the standard rate of VAT in Europe is just 15%, whilst it is currently 20% in the UK.
Inside or outside of Europe, therefore, it seems clear that the UK is going to continue to raise revenue through a VAT and that this tax obligation is likely to remain a major issue for any professional practice.
Current VAT rules
Any business (including one structured as a partnership) with an income over £85,000 must register with HM Revenue & Customs (HMRC) as a VAT-registered business.
This means that you must levy VAT on a wide range of the goods and services you provide, but may also reclaim the VAT on goods and services which your business has bought.
The calculation of VAT charged and VAT paid is the subject of a return you must make to HMRC every three months, together with your payment of the net amount due.
VAT is charged at different rates, according to the particular goods or services sold, and may be at the standard rate of 20%, a reduced rate of 5%, a flat rate (typically between 4% – 14% depending on your business actitives) or be zero-rated for VAT purposes.
It is chargeable on an especially wide range of items, such as:
- the goods and services your business sells;
- any goods you hire or loan to a customer;
- business assets you sell;
- commissions you charge;
- goods and services you sell to your staff;
- goods owned by your business, but for your personal use; and
- non-monetary transactions, including gifts, part exchange and barters.
Clearly, every profession is in the business of providing different goods and services – health care provided by doctors to NHS patients is VAT-exempt, for example – and the calculation of VAT liability may vary widely from one profession to another and from one practice to another.
Practice loans for VAT funding
However robust and carefully managed your practice budget, VAT liabilities may impose a decided strain on your cashflow and the availability of essential working capital.
Yet VAT demands are relentless in their regularity – coming around every three months – and represent a liability that may be met with fines and penalty charges by HMRC if the liabilities are not paid or are paid late.
This raises decisions your practice may need to make about borrowing to meet those VAT liabilities. Your decisions fall into two broad categories:
- your practice might already have one or more secured loans – secured against the personal assets of the firm’s partners;
- such borrowing is typically quite long-term (10 years or more) and repayments over the full term of the loan are likely to include a considerable sum in interest;
- partners offering the security of personal assets do so at some considerable risk, since financial failure of the business may mean that repayments on the loan cannot be maintained and the assets may be forfeit;
- if you are looking for practice loans for VAT funding, however, you are more likely to be in search of much shorter-term borrowing;
- this is where an unsecured fixed rate loan, for, say, three or 12 months may provide the more realistic solution – and may help to spread the costs of meeting your VAT liabilities over the repayment period you choose;
- the shorter timescale means that interest charges also accumulate over a considerably reduced period;
- such unsecured loans for your professional practice are typically advanced at a fixed rate of interest and require fixed monthly repayments, making cashflow management more straight forward and less onerous;
- you may be given the option of your loan being paid directly to HMRC or into the bank account of your practice; and
- you may also have the option of continuously rolling over one short-term loan into the next, thus giving your practice a permanent source of funding to meet not only this quarter’s VAT liabilities, but those well into the future.
VAT liabilities may be a headache for any professional practice, but, with the help of practice loans for VAT funding, your essential cashflow management and the ability to spread out the costs over the period you choose may prove a godsend.