If you earn over £85,000, you must register for VAT. Coconut Supports both the Standard and Flat Rate VAT Schemes. Depending on which you select, the app will have different behaviour.
What are the VAT Schemes?
Standard Rate VAT Scheme
On this scheme, you charge VAT on invoices (usually 20%) and pay this over to HMRC. You can reduce the amount you pay by claiming the VAT you pay on allowable expenses.
You have to keep track of the VAT you charge on your income, and also the VAT you pay on expenses. Learn more on gov.uk.
Flat rate VAT scheme
If you earn under £150,000, you can opt to use the flat rate scheme instead of the Standard Rate scheme. It’s intended to be a simpler way to manage your VAT.
You still charge the relevant VAT rate on your sales (usually 20%). Then each VAT period, you add up your total sales including VAT, and multiply it by the relevant flat rate for your industry. You don't have to keep track of VAT on expenses. Learn more on gov.uk.
How it works in Coconut
The following table shows how each scheme works in Coconut:
VAT on Income
20% on Income
20% on Income
VAT on Expenses
0%, 5% or 20% on Expenses
No VAT recorded
VAT Payment due
Pay HMRC the 20% on income charged to clients, minus any VAT paid on expenses
Pay to HMRC your total income, inclusive of VAT, multiplied by the relevant 'flat rate %'.
Your tax figures will be presented excluding VAT.
Your tax figures will be presented including VAT. You should also record the VAT payment you make as a deduction from your income (see below).
Recording VAT payments
VAT payments made to/from HMRC should be excluded from your profitable tax, and should be recorded as 'VAT Payments'
The payment you make to HMRC for your VAT should be deducted from your total taxable income. As such, you should categorise this payment as 'Income'
Completing a VAT return
Report vat on sales, vat on purchases, net sales and net purchases to HMRC.
Report vat on sales, gross sales and gross purchases to HMRC.
Think of it this way: On the Standard Rate scheme, the VAT should be ignored when working out your profits, as the money just through you and onto HMRC.
On the Flat Rate scheme, you can make a 'profit' on the difference between the VAT you add on to what you charge and the VAT you claim back from HMRC - this 'profit' will be taxable as part of your overall profit. As such, you need to include both the VAT you charge and the VAT repayment you receive in the figures your report for tax.
That's why the Flat Rate figures are presented inclusive of VAT, and why you should deduct the Flat Rate VAT repayment you receive from your total income too.
VAT can be a difficult area to get right. If you’re unsure, speak to your accountant or tax advisor.