Budgeting is the most crucial part of personal finance planning which helps in optimizing the expenses and ensures financial stability by maintaining funds for savings and emergencies. However, budgeting mistakes can ruin the entire financial planning and can even prove detrimental for your financial goals. Hence avoiding budgeting mistakes can not only ensure that you are on the right rack to achieve your financial goals but ensures financial stability as well. Let us discuss the most commonly made budgeting mistakes and solutions for avoiding these budgeting mistakes.

1. Not Tracking Your Spending

This budgeting mistake is one of the main reasons which leads most people towards debt and financial trouble. If you cannot track where the money is going you won’t be able to control your expenses which will eventually lead to reduced savings and will decrease your financial stability.

Solution:

Maintaining the data for expenses is the simple and effective solution for this mistake. Tools like Microsoft excel, budgeting apps or even the old school way of maintain a notebook can help you in tracking your expenses. This habit of tracking expenses will not only stop you from making this budgeting mistake but will provide the information regarding the expenses which you can cut back in order to align your spending amount with your budget.

2. Setting Unrealistic Goals

Setting unrealistic goals is a budgeting mistake that not only restricts even the necessary expenses sometimes but also leads to frustration leading to failure in sticking to your budget. Budgeting should be considered as a habit or a way of life not a punishment which you have to put yourself into.

Solution:

Setting achievable and realistic goals will not only avoid this budgeting mistake but will also give the confidence and motivation to achieve your goals in future regarding and expenses. It works for any schedule whether it is regarding budgeting or any personal goal that you have decided to achieve. So, the key here is to start small and gradually adjust the goals as you move further.

3. Ignoring Irregular Expenses

Your irregular expenses like car repairs, home improvement emergencies, medical bills or annual subscriptions can throw your budget offtrack if you have ignored by considering them exceptions. These expenses will absorb your savings or emergency funds like sponge absorbs water. It is one of the most common budgeting mistakes that a lot of people make and suffer the consequences like depleted emergency fund and savings.

Solution:

It is hard to plan exactly for the uncertain events like car repair, home repairs, medical bills, sudden change in insurance premiums etc. But keeping some percentage of your income aside for these unexpected expenses in a separate savings account can not only provide a cushion for your savings and emergency funds but will also help you in monitoring these expenses for a given time period so that you will be able to tackle these situations better in future.

4. Not Adjusting Your Budget

Anything which does not evolve will either lose the importance and will eventually perish to exist, and this statement goes exactly for your budget. If you are not periodically reviewing your budget and not monitoring how your current budgeting method is progressing towards your financial goal. Your budgeting is losing the effectiveness to make you reach your financial goals.

Solution:

Creating a schedule to review your budget monthly and adjusting the budget as per your current financial situation is the solution to avoid this budgeting mistake. This might not seem like a fatal mistake but this mistake really creeps up with time and can impact your budget severely after a while.

5. Underestimating Small Expenses

This budgeting mistake often goes unseen as it is tough to account for every little detail regarding your insignificant monthly expenses. For an example having a cup of coffee outdoor, your weekend dining rituals, smoking expenses, entertainment subscriptions etc. These are the expenses which must be accounted to avoid increase in your monthly expenditure and safeguard your savings monthly.

Solution:

Including a new all of a sudden is tough for everyone but continuous effort made in direction to mitigate these expenses can improve your budgeting drastically. The solution to avoid this budgeting mistake is to keep track of all expenses no matter how small they are and include them in your budget under personal expenditure. The trick here is you can only control what can track.

6. Neglecting to Save for Emergencies

A big percentage of people suffering from high interest rate debt are the people who overlook the importance of saving for emergencies. The only resort left with them is turn to their credit cards in the hour of need which only raises the probability of increasing debt and that too at higher interest rates.

Solution:

Emergencies can happen anytime and if you are not prepared for them be prepared to suffer for months or years in the near future as these expenses can throw you off track from your financial goal and can throw your finances off the cliff and in worst case scenario you may even end in debt. The solution to avoid this budgeting mistake would be to plan to save a minimum of three months of living expenses in advance to tackle emergency expenses.

7. Not Prioritizing Debt Repayment

Stalling repayments for long time will only lead the amount you owe to the creditor to increase substantially especially if it is a credit card. This budgeting mistake happens due to lack of awareness as people mostly think that their debt is decreasing each month even if they are just paying the minimum payment due. However, their debt is increasing as the minimum payment due is only 1.5 to 2 percent of the debt and the rolling over balance is accruing interest each month.

Solution:

This budgeting mistake can be avoided by prioritizing the debt repayment by allocating a fixed amount towards debt which is greater than minimum payment. Repayment strategies like snowball repayment method or avalanche method can be used to save money on interest while repaying the debt.

8. Relying on Credit for Everyday Purchases

Credit cards are an amazing tool to use debt but if used inefficiently they can be a double edge sword which can tear your budget apart in no time. One of the biggest budgeting mistakes that people make while using the credit cards is actually using their credit cards for everyday purchases. Tis can not only lead to accumulate balances at a higher rate if not paid each month in full but can also have a negative effect on the credit score due to credit card balance increasing the credit utilization ratio.

Solution:

The solution is simple for this budgeting mistake which is to use your money not credit to pay for everyday needs. Credit cards should be used only if you are certain that you will pay before the due date and in full.

9. Not Accounting for Inflation

Inflation the hidden killer for your savings that has to be included in any budget as the expenses are impacted directly by the inflation. It is the most common budgeting mistake done by people who are not aware about the inflation factor. A separate slack in saving should be provided to compensate inflation factor in the budget.

Solution:

To root out this budgeting mistake periodic reviews and adjustments is the perfect solution. As efficient monitoring and adjustments will ensure that savings and spending are normalized and will remain unaffected by the inflation rate.

Efficient planning and execution in budgeting can be considered as an anchor of your ship in your journey towards financial freedom. Understanding what can go wrong will definitely help in proactive planning and efficient execution of your budget. It takes commitment and dedication in reviewing the budget and making the changes. But if you are putting in the effort you will notice that this effort is definitely helpful in achieving your financial goals.

There are basically two ways to live financially, first is saving your income and investing it over time to ensure your financial freedom which is not bad at all. Now the second way to live financially is to use credit as money and use the debt to get assets and leverage you way towards your financial freedom. The most widely used credit instrument today is none other than the lifeline of youth and safety net for the elderly and that is credit cards. If used properly credit cards can benefit in many ways which includes an amazing credit score, rewards and benefits, access to better deals for mortgages and personal loans. However improper use of credit cards can land you in issues like debt with higher interest rates, low credit scores, penalties, financial stress etc.

Knowledge and awareness about credit card mistakes to avoid can help the customers in informative decision making about their expenses and help them in improving their credit scores. Hence this information about major credit card mistakes can not only save customers from making terrible financial decisions but will also help in utilizing the complete potential of credit available to them. Let us do a qualitative analysis to find solutions for these major credit card mistakes that customers must avoid.

1. Not Understanding Your Terms and Conditions

Out of all major credit card mistakes this mistake is the most frequent and a majority of customers suffers just because of ignorance and laziness to not read the terms and the conditions of their credit cards. People who do not go through the terms and conditions properly are the ones who gets unpleasant surprises down the road with their credit cards.

Solution:

Using your credit card means taking credit from the credit card provider. It is simple common sense to go through the terms and conditions before taking debt from anyone. You must have the complete information about interest rate, credit card annual membership fee, rewards and repayment terms. Just by being proactive and aware this major credit card mistake can be easily avoided.

2. Only Making Minimum Payments

People think that making a minimum due each month will reduce the credit card balance and will save them from accruing interest each month, but minimum amount due us required just to prevent the account from going in the past due status. If we look closely, we can easily find out that the minimum due is roughly 1.5 percent of the balance plus any past dues and interest charges. By paying the minimum amount due you will make the payment for 1.5 percent of the amount used but your remaining balance will start accruing interest on the average rolling balance daily. It is one of the major credit card mistakes that people do just because of the incomplete understanding of the minimum balance and mechanism of accrual of interest each month.

Solution:

This reason behind this mistake is basically lack of knowledge of how the minimum payments work in favour of the banks and not for the customers. Making payments in full every month before the due date should be the idea approach for repaying the balance. However, if you do not have the funds available for the complete payment of balance before the due date try make as much as you can above the minimum payment due. This is how you can avoid making this major mistake with credit cards.

3. Missing Payments

Missing your payments means that you are not even able to make the minimum payment due on time. It reduces your credit score and impacts your credibility as a customer for credit. In addition to lowering your credit score it will impact the interest rates on your purchases and you will have past dues which will accrue interest as well. This credit card mistake to avoid is actually a fatal one considering the impacts it will have on your account.

Solution:

This problem can be resolved with the help of automated reminders. You can simply add the due date on the google calendar app so that you are reminded on your smart phone for the upcoming payment in advance. It would be even better to get the automatic payment feature activated for the minimum payments to make sure that you do not miss on the payments.

4. Out Your Credit Limit

This mistake is more likely a discipline issue or mishandling the credit limit assigned to you. More than 80 percent customers do not know the impact of maxing out their credit limit. Utilizing the entire credit limit or the amount close to the maximum limit cam impact credit score and will make it tough to get credit in future. This major credit card mistake is directly linked to the credit utilization ratio which is a critical factor in determining the credit score.

Solution:

This credit card mistake can be avoided by actually not being a shopaholic and exercising discipline on your expenditure. Keeping a low credit utilization ratio will not only help in maintaining a good credit score but will also help is getting benefits and offers from the credit card provider. The advised value is 30 percent of your credit utilization ratio, however keeping the utilization close to 10 percent can really help in getting credit benefits from the credit card provider.

5. Using Credit for Everyday Expenses

Using credit card for groceries can be the best utilization of the credit card as it also gives the reward points for most of the credit cards. But using the credit card as the only source for daily expenses can land you in trouble because the money you are spending accrues interest on daily basis for the number of days it will be rolling over after the due date. Its better to shop once or twice in a month for groceries to keep the spending in check. This credit card mistake to avoid can really slip through if not monitored properly.

Solution:

The golden rule to financial management is to use credit to create assets and use income to cover up the expenses. However, if you use credit card for groceries and shop for once or twice in a month and pay the balance before the due date you will not only be increasing the credit score but will also end up gaining reward points which can be redeemed later. This credit card mistake can be avoided by creating a budget and paying the balance before due date every month.

6. Taking Out Cash Advances

Using your credit card for cash advances typically comes with high fees and immediate interest charges.

This is the most critical credit card mistake to avoid as the cash advances are usually in the maximum interest rate slab for almost every bank. The interest is charged right from the moment you take out cash and cash advances also have a cash advance fees which can be up to 10 percent of the transaction amount. So, it would be wise to use the credit card for your purchases only as taking cash out of your card is an expensive deal for you.

Solution:

You would be just surprised to know how much it can cost you if you do not have the information about taking cash advance because the charges under cash advance are almost equally charged as your penalty priced transactions. The transaction fee does the job of salt on the injury as transaction fees can be up to 10 percent of the amount transacted. Personal loans are always a better alternative in emergencies as compared to the cash advance. However, it is always beneficial to make a budget and save some money for emergencies. This major credit card mistake can be avoided by effective budgeting and definitely with the common sense to have a backup for emergencies.

Credit cards are just like your best friend to help you with financial issues if used properly, however if not used properly they can be your worst enemy as they can put you in substantial debt with high interest rates and can impact your credit score badly. By having the awareness and knowledge about the major credit card mistakes to avoid you can actually use the credit cards to their full potential and unlock your financial potential by improving your credit score.

Credit cards are the lifeline for most people and they provide variety of benefits for example you can get rewards points for shopping which you can later redeem, credit cards do provide cashback, miles benefits if you use them for air travel and discounts for using the credit card for fuel at gas stations. However, if do not use credit cards carefully because they can lead you into high interest debt and financial trouble as it can throw your personal finance off balance. Misusing the credit cards can impact your credit score severely.

Understanding Credit Cards in the UK

There are various credit cards which are available in the United Kingdom and every card provides a different feature and benefits. It is very important to go through the benefits of the card like annual membership fee, interest rates, introductory offers, benefits on grocer shopping and travel rewards.

Standard Credit Cards: As the name suggests these are cards with standard services and no rewards points or cashback schemes but generally these are the cards which come with no annual membership fee. So, these are free to use and most banks provide introductory interest rate offers on purchases on these cards.
Rewards Credit Cards: These are the credit cards which comes with the feature of reward points which means you will be get reward point for every pound you will spend using your credit card. Some banks provide the card with double cash reward schemes which means that you will get one reward point when you will spend the money and one reward point when you will make the payment for the balance in your card. The reward points that you have earned can be redeemed later either through a check, transfer to your checking account or gift cards for various stores.
Cashback Credit Cards: As the name suggests these are the cards which provides some percentage of your spending back to your credit card available balance which we call cashback. Cashback credit cards are best suited for the people who use the credit cards for various needs like shopping, groceries, travel, fuel, etc. There are various offers provided by the banks at various seasons to get extra points or increased cashback. These cards are perfect to save money in terms of cashback.
Balance Transfer Credit Cards: These are credit which comes with the feature of balance transfer which is in simple words is the feature to consolidate or transfer your debt from other cards to the present card usually at a zero percent interest rate for a predefined period by the banks. These cards provide an excellent facility to consolidate the debt at low interest which results in substantial savings in terms of the interest that would have paid for the balances in the other cards.
Travel Credit Cards: These are the cards which give you points on air travel, hotel reservations etc. These are best suited for the people who travel frequently. The benefits may vary with different cards. Banks also provide offers give some extra mile points on covering some specific number of miles.
Credit Builder Cards: These are similar to secured cards provided in the United States, the collateral amount submitted while getting the card is used as a credit limit and the customer can deposit the money in the account in case the limit is utilized. These are basically used to improve credit score so that consumers will eligible for the credit card. Banks review the eligibility of the user usually after one year to decide to upgrade to a credit card.

Best Practices for Using Credit Cards in the UK

Choose the Right Card: If you select the right card as per your needs more than half of your work is done for an example if you need card for everyday shopping then the rewards is the best card for you, if you travel a lot then the travel card is best for you and if you use your card rarely then the standard card is the best choice for you.
Assess Your Needs: Utilization of credit card should be sensible; you should only use your card either strictly for your needs or in case of emergencies. Unnecessary use of the credit card must be avoided as it can put you in the zone higher and can create issues with your credit score.
Compare Offers: Most people are not aware about the benefits of comparing features like interest rates, introductory offers, and rewards schemes, it is just like getting a pair of jeans for yourself you will pick the one which suits your needs and is beneficial in terms of price. In context of the United Kingdom, you can visit websites like Money supermarket, compare the market, or Uswitch to find the best deals regarding credit cards.
Maximize Rewards and Cashback: You can take the advantage of the reward points by charging the regular expenses like groceries, fuel and bills to credit and accumulate the points to redeem them later. You should lookout for the special promotions for higher rewards or cashback which banks might provide for a limited time every year.
Manage Your Spending: It is really common sense you only bite what you can chew, similarly in case of credit cards you should only charge what you can easily afford to pay because it would be you who would be paying the interest on your balance. Tracking your spendings can really help in controlling and even stopping you from going over the limit on your and almost every card provider has an app for credit card customer where you can easily keep track of your expenses.
Build and Maintain Good Credit: Building a good credit score is like building trust with the creditors that you can responsibly manage your debt. The best ways to manage would be to keep the credit card balances low and make at least minimum payment due each month before due date to avoid getting past due charges which can give negative remarks on your credit report. Keeping your credit utilization below 30 per cent is recommended. Checking your credit report regularly is a good habit which ensures that credit history is reported accurately and there are no errors that can impact your credit score.
Use Balance Transfer Offers Wisely: Consolidating credit form a former credit into a new credit card by using the balance transfer offers can really save substantial amount of money. The best strategy would be to transfer the balances from your old cards to the new card and take advantage of the introductory balance transfer offers to save interest. Try to pay the balance transfer amount within the introductory period as the once the period is over this balance transfer amount will be charged at the regular interest rate for purchases.
Travel Smart with Credit Cards: You can avoid foreign transaction fees which is the fee charged when you are charging your card at a merchant in foreign currency. Travel card cards also provide very reasonable rates for currency exchange. Not only in terms of the fees and the exchange rates every time you travel internationally you should notify the card provider to make sure that your card is working without any interruption during your travel.
Leverage Consumer Protection: United Kingdom has amazing consumer protection laws which safeguards the consumers from fraudulent activities. Section 75 of consumer credit act ensures the protection for customer’s money if the goods or services are not up to the mark or not delivered under the range of 100 pounds to 30,000 pounds. For the charges below 100 pounds customers can request a charge back from the card provider if something is wrong about the transaction.
Stay Safe Online: We all do majority of our transactions by using websites and applications which is a great advantage of technology. However, with the advancement in technology chances of frauds have risen as well. Consumers must be aware about online security and should only use secured websites for transaction using credit cards, a common tip here would be to look for HTTPS in the URL of website on which you are making the transaction.
Tips for Choosing the Best Credit Card: Tips for choosing a credit card would be really simple you should get the cards with lower interest rate if you are not going to pay the balances in full every month. Make sure that there is no annual fee for the card and if there is a fee make sure that the benefits are worth paying an annual fee for the card. Check for introductory offers on purchases or balance transfers so that you can consolidate debt or create an asset at zero per cent interest. At last, you must check for the rewards and benefits associated with the card like travel insurance, purchase protection, extended warranties and cashback offers.

Value Added Tax (VAT) schemes in the UK are designed to simplify VAT administration for businesses and provide options for managing VAT liabilities. It’s important for businesses to monitor their taxable turnover regularly to determine their VAT obligations and eligibility for VAT accounting schemes. Understanding these thresholds can help businesses manage their VAT compliance and choose the most suitable VAT accounting scheme for their needs.

Here’s an overview of the main VAT Accounting schemes in UK available:

1. The VAT Flat Rate Scheme

It is a simplified VAT accounting method designed to make it easier for small businesses to calculate and manage their VAT liabilities. Under this scheme, instead of calculating and accounting for VAT on each individual sale and purchase, eligible businesses apply a fixed flat rate percentage to their VAT-inclusive turnover.

Who are eligible for VAT flat rate scheme?

Businesses with a VAT taxable turnover (excluding VAT) of £150,000 or less in the past 12 months (excluding VAT) are eligible to join the VAT Flat Rate Scheme. Once registered for the scheme, businesses can remain in it until their total income (excluding VAT) exceeds £230,000.

How it Works:

Businesses applying the Flat Rate Scheme use a fixed flat rate percentage determined by HMRC based on the industry sector of the business. The flat rate percentages range from 4% to 16.5%, depending on the type of business.

Calculating VAT Liability: Instead of calculating VAT on each sale and purchase individually, businesses simply apply the flat rate percentage to their VAT-inclusive turnover for the period. The result is the VAT liability that the business owes to HMRC.

Input Tax: Businesses under the Flat Rate Scheme generally cannot reclaim VAT on most purchases, with some exceptions for certain capital assets over £2,000 and specific goods.

To join, fill in form VAT600FRS, if you’ve already registered for VAT. You can leave the scheme if you are no longer required to file VAT. Remember, once left you cannot join the scheme again for the next 12 months.

2. VAT Annual Accounting Scheme

This scheme is designed to simplify VAT administration for eligible businesses in the UK. Under this scheme, businesses submit one VAT return annually and make advance payments towards their VAT liability based on estimated turnover.

Who are eligible for VAT annual accounting scheme?

The VAT Annual Accounting Scheme is available to businesses with an annual taxable turnover of up to £1.35 million.

Certain businesses are not eligible for the scheme, including those involved in certain financial services, businesses that have been penalized for VAT evasion or other VAT-related offenses, and businesses that have been subject to certain insolvency procedures.

Accounting Method:

Under the Annual Accounting Scheme, businesses submit one VAT return annually, rather than quarterly. Businesses make advance payments towards their VAT liability based on their estimated turnover for the accounting period.

These advance payments are typically made on a monthly or quarterly basis throughout the year.

VAT Returns:

The VAT return includes details of the VAT due on sales and VAT reclaimable on purchases for the entire accounting period. Businesses may need to make a final adjustment to their VAT liability based on their actual turnover for the year.

Advance Payments:

Businesses estimate their annual turnover when applying for the Annual Accounting Scheme and make advance payments towards their VAT liability based on this estimate. The advance payments are calculated based on a predetermined percentage of the estimated annual turnover, with the percentage varying depending on the frequency of payments (monthly or quarterly).

Advance Payment	Deadline to pay advance payment	How much to Pay
Monthly	Due at the end of months 4, 5, 6, 7, 8, 9, 10, 11 and 12	10% of your estimated VAT bill
Quarterly	Quarterly Due at the end of months 4, 7 and 10	25% of your estimated VAT bill
Final Payment	Within 2 months after the end of your accounting period.	Difference between advance payment and actual VAT bill.

At the end of the accounting period, HMRC reconciles the advance payments with the actual VAT liability based on the business’s actual turnover for the year.

To join, fill in form VAT600 AA, if you’ve already registered for VAT. You can leave the scheme if you are no longer required to file VAT. Remember, once left you cannot join the scheme again for the next 12 months.

If you overpaid the advance, you could claim for refund. Please note, you will only be able to get 1 refund in a year.

3. Cash Accounting Scheme

Under this scheme, businesses account for VAT based on the payments they receive and make, rather than on invoices issued and received.

Who are eligible for VAT Cash Accounting scheme?

The VAT Cash Accounting Scheme is available to businesses with an annual taxable turnover of up to £1.35 million. Also, you have not joined the VAT Flat rate scheme.

Accounting Method:

Businesses only account for VAT on their sales when they receive payment from their customers.
Similarly, businesses can reclaim VAT on their purchases when they make payments to their suppliers.

This means that VAT is only accounted for when cash transactions occur, rather than when invoices are issued or received.

Cash Flow Management:

The Cash Accounting Scheme can help businesses manage their cash flow more effectively by allowing them to defer VAT payments until they receive payment from their customers. This can be particularly beneficial for businesses with irregular cash flows or long payment terms, as it provides greater flexibility in managing VAT payments.

VAT Returns:

Businesses using the Cash Accounting Scheme still need to submit VAT returns to HMRC on a regular basis. VAT returns include details of the VAT due on sales and VAT reclaimable on purchases for the accounting period. VAT returns are typically submitted on a quarterly basis, but businesses can also opt to submit monthly or annual VAT returns.

4. VAT Margin Schemes

The VAT Margin Scheme is a special VAT accounting scheme that applies to the sale of second-hand goods, works of art, antiques, and collectors’ items. You cannot use margin scheme for any item you bought for which you were charged VAT, precious metals, investment gold and precious stones. Certain goods are excluded from the scheme, including new goods, items sold under auctioneers’ schemes, and items acquired for export outside the EU.

It allows businesses to calculate VAT based on the difference between the selling price and the purchase price of these goods, rather than on the full selling price, i.e.,

VAT payable = Selling price of goods – Purchase price of goods

You pay VAT at 16.67% (one-sixth) on the difference.

For items that aren’t covered under Margin schemes, like business overheads, repairs, or parts, they should be reclaimed under Standard VAT returns.

Businesses using the VAT Margin Scheme must keep specific records of their purchases and sales, including details of the purchase price, selling price, VAT calculation, and any other relevant information. Records must be kept for at least six years and be available for inspection by HM Revenue & Customs (HMRC).

The VAT rate applied to the margin depends on the type of goods sold and whether the business is using the Global Accounting Scheme or the Individual Items Scheme.

Global Accounting Scheme:

It allows businesses to calculate the total margin for all eligible goods sold during a VAT accounting period and apply the appropriate VAT rate to determine the VAT payable. This scheme is suitable for businesses that sell a large volume of low-value items with similar VAT rates.

VAT payable = total selling price of eligible goods – total purchase price of these goods

Individual Items Scheme:

It allows businesses to calculate the margin and apply the VAT rate separately to each eligible item sold. This scheme is suitable for businesses that sell high-value items with different VAT rates or that want to track VAT on each item individually.

VAT payable = selling price – purchase price of each eligible item

This scheme provides granular VAT calculation and great flexibility to businesses in pricing and VAT management by applying different VAT rates to different items sold.

5. VAT Retail Schemes

VAT retail schemes are special VAT accounting methods designed for businesses operating in the retail sector. These schemes provide simplified VAT accounting options tailored to the specific needs of retail businesses, allowing them to calculate VAT on their sales in a more straightforward manner. This scheme is applicable to the businesses with a turnover less than £130 million. There are 3 VAT retail schemes:

6. Point of Sale Scheme (PoS):

Under this scheme, businesses calculate VAT on their sales at the point of sale or when the goods are sold to customers. VAT is calculated based on the selling price of the goods, including any applicable discounts, and is accounted for in the VAT return for the period in which the sale occurs.

How to calculate:

Add up all the sales for each VAT rate for the VAT return period.
For 20% rated goods, divide the sales by 6.
For 5% rated goods, divide the sales by 21.

Example:

You’ve sold £30,000 worth of 20% rated goods, and
£1000 worth of 5% rated goods.

VAT to be paid = (£30,000 / 6) + (£1000/5)

= £5,200

This means, you need to record a total of £4,005 for the VAT return period.

7. Apportionment Scheme:

Under this scheme, businesses apportion their sales into different VAT rate categories based on the proportion of each type of sale. VAT is then calculated separately for each category of sale, allowing businesses to apply the appropriate VAT rate to each portion of their sales. This scheme helps businesses accurately account for VAT on mixed supplies and ensures compliance with VAT regulations for different types of goods.

This scheme could be used if you buy goods for resale. It can’t be used if you provide services, goods that you’ve made or grown yourself, catering services, and the turnover (excluding VAT) can’t be more than £1 million a year.

How to calculate your VAT

Calculate the total value of goods purchased for resale in the VAT period for each VAT rate.
Divide the total of purchases for each VAT rate by the total for all purchases.
Multiply the outcome by your total sales, divided by 6 for 20% rated goods, and divided by 21 for 5% rated goods.

To calculate the total VAT for the period=

(total value of purchase for 20% VAT rate / total purchase ) * (total sales/6) + (total value of purchase for 5% VAT rate / total purchase ) * (total sales/21)

Example

In the VAT period you buy goods at the following VAT rates:

Total value of goods purchased	VAT rate
£20,000	20%
£5,000	5%
£5,000	0%
Total Purchase	£30,000

Let’s assume your total sales are £40,000.

Total VAT for the period:

= {(£20,000 / £30,000) x (£40,000 / 6 )} + {(£5,000 / £30,000) x (£40,000 / 21)} = £6,667.33 + £1,904.92

= £8,572.25

8. Direct Calculation Scheme:

The Direct Calculation Scheme is available to businesses that sell goods subject to VAT at different rates and have a turnover below a certain threshold.

This scheme simplifies VAT accounting by providing businesses with a straightforward method for calculating VAT on their sales, based on predetermined mark-ups. This scheme is useful, if you make a small proportion of sales at one VAT rate and the majority at another rate. Your turnover (excluding VAT) can’t be more than £1 million a year.

How to calculate your VAT:

Calculate the expected selling prices (ESPs) for your minority or majority goods. Use the one that’s easier.
Total up the ESP for the VAT period.
If your goods are standard rated at 20% divide the total ESP by 6. If they’re zero rated, deduct the total ESP from your total sales. This will give you your sales at 20%. Then divide by 6.
If you have reduced-rate (5%) goods deduct the ESP of this from your sales before calculating your VAT at 20%. Then calculate the VAT due on reduced-rate goods by dividing the ESP of these by 21. Add this figure to your 20% VAT to get total VAT due.

Example:

Let’s consider a retail business that sells a variety of goods subject to different VAT rates:

Goods Category	VAT Rate	Good cost price	Predetermined Percentage Mark-ups (Assumption)
Standard-rated goods	20%	£100	50%
Reduced-rated goods	5%	80	30%
Zero-rated goods	0%	£120	20%

Let’s calculate VAT for each type of goods sold:

The business calculates VAT on its sales using the predetermined percentage mark-ups on the cost prices of goods.

Selling price = Cost price + (Cost price × VAT rate mark-up percentage)

Goods Category	Selling Price	VAT
Standard-rated goods	£100 + (£100 × 50%) = £150	20% of £150 = £30
Reduced-rated goods	£80 + (£80 × 30%) = £104	5% of £104 = £5.20
Zero-rated goods	£120 + (£120 × 20%) = £144	0% of £144 = £0

Total VAT Liability:

The business adds up the VAT amounts calculated for each type of goods sold to determine its total VAT liability for the accounting period.

Total VAT liability = VAT on standard-rated goods + VAT on reduced-rated goods + VAT on zero-rated goods

Total VAT liability = £30 + £5.20 + £0 = £35.20

Submission of VAT Returns:

The business includes the total VAT liability calculated using the Direct Calculation Scheme in its VAT returns, which are typically submitted to HMRC on a quarterly basis.

By using the Direct Calculation Scheme, the retail business can accurately calculate its VAT liability based on predetermined mark-ups on the cost prices of goods, providing a simplified method of VAT accounting for businesses with diverse product offerings and different VAT rates.

VAT overpaid or underpaid:

If you pay too little VAT, then you may be charged 7.75% interest by HMRC.
If you pay too much VAT, then you may be able to claim 4.25% interest to HMRC. Please note, HMRC will not usually repay interest if you’ve paid too much VAT because of a mistake you made.

Goods can be dispatched by post, courier or collected by person. Before you charge zero-rate VAT on the goods, make sure you have sufficient bill to support that the goods are exported outside the UK.

Q-1 What will happen if the exported goods are returned?

You do not have pay any VAT tax as no sale has taken place.

Q-2 Can you charge zero-rate VAT on the goods intended to go outside UK but collected by someone within UK?

You don’t have to charge VAT for goods going outside the UK if they’re being picked up by someone in person, but you’ve got to show evidence that the goods will/are being exported out of the UK. You must charge VAT on a good that’s couriered to someone in the UK before it’s exported outside UK, since it’s not being exported directly.

Q-3 What will happen if you send goods from Northern Ireland outside EU and UK?

You will charge zero-rate VAT on the goods.

Q-4 What will happen when the goods are exported outside the EU but transit through it?

You will charge zero-rate VAT if the goods are delivered to EU country but not sold and the EU business process the goods to the intended recipient outside the EU. Maintain a record of proofs to support the export destination.

Q-5 Which country VAT rules to use when exporting goods?

You will be following the VAT rules of the destination country, it always depends on the rules defined for the place of supply.

Q-6 What will happen if you are importing goods but not a registered VAT?

You still need to pay VAT on the imported goods but will not be able to claim the VAT to the HMRC.

Businesses importing goods or services into the UK must ensure compliance with VAT and customs regulations, including registering for VAT and obtaining appropriate import documentation, such as import declarations and customs clearance documents.

Importing Vehicle into the UK

If you intend to bring vehicle in the UK, then you must comply to UK rules before importing a vehicle permanently in the UK.

Inform HMRC about your intent to bring a vehicle to the UK.
Pay custom duty and VAT on the vehicle import.
Ensure that your vehicle complies with UK regulations, including safety, emissions, and technical standards.
Register your vehicle with the Driver and Vehicle Licensing Agency (DVLA) in the UK.
Pay vehicle tax.

The below table details the VAT rate charged under different situations.

#	Category	Situation	VAT charged
1	Export of goods	Send goods to a destination outside UK	Zero-rate
2	Export of goods	Send goods from Northern Ireland to a destination outside UK and EU	Zero-rate
3	Import of goods	Goods imported in the UK	Same as standard VAT rate, except for artworks, antiques, and collectors’ items, these are charged at reduced VAT rate.
4	Import of vehicle	Decide to import a vehicle to the UK	HMRC will decide the payable VAT depending on the vehicle’s value, age, and origin.
5	Building Houses	Build a new house or work for disabled people in the house	Zero-rate VAT
6	Building Houses	Renovating a house/flat Converting a building into a flat/house Installing energy saving products	Reduced-rate VAT

Different schemes that could be used while building a house/flat.

DIY housebuilders’ Scheme

You can reclaim VAT on the self-building houses under the DIY housebuilders’ scheme. The scheme is available to individuals who are building or commissioning the construction of a new residential property for use as their main residence.

The property must not be intended for use as a business premises or for any commercial purposes. Self-builders must submit their VAT reclaim claims to HMRC within six months of the completion of the construction work.

VAT Domestic Reverse Charge Scheme

The VAT Domestic Reverse Charge scheme shifts the responsibility for accounting for VAT from the supplier to the customer (recipient) of the construction services. With this scheme, HMRC aims to reduce the risk of missing trader fraud and improve compliance within the construction sector by preventing the misdeclaration or non-payment of VAT. It primarily applies to businesses involved in construction and building services, including construction contractors and subcontractors.

How it works?

A Supplier provides relevant construction services to VAT-registered customers issuing invoices that indicate a reverse charge applies for the VAT amount and state that the customer is responsible for calculating the VAT amount. The supplier does not charge VAT on their invoice, but instead, the customer self-accounts for both VAT on purchase and VAT on sales in their VAT return. The customer must report both input and output VAT amounts on the same VAT return, which results in the net VAT liability.

Where it cannot be used?

Domestic Reverse Charge should not be used in below situations.

Exempt supplies like financial services, healthcare services, and educational services, among others.
When the end customer or consumer is the recipient of the goods or services.
Retail schemes, which are used by retailers to account for VAT on sales to the public, should not be combined with the Domestic Reverse Charge
Transactions involving business-to-consumer (B2C) sales should not use the Domestic Reverse Charge.
Supplies that fall outside the VAT scope or are subject to different VAT rate.

1. Not Understanding Your Terms and Conditions

2. Only Making Minimum Payments

3. Missing Payments

4. Out Your Credit Limit

5. Using Credit for Everyday Expenses

6. Taking Out Cash Advances

Understanding Credit Cards in the UK

Best Practices for Using Credit Cards in the UK

1. The VAT Flat Rate Scheme

2. VAT Annual Accounting Scheme

3. Cash Accounting Scheme

4. VAT Margin Schemes

5. VAT Retail Schemes

6. Point of Sale Scheme (PoS):

7. Apportionment Scheme:

8. Direct Calculation Scheme:

Importing Vehicle into the UK

DIY housebuilders’ Scheme

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UK TAX MANAGEMENT

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