VAT (Value Added Tax) is something you come across daily on receipts when buying or selling goods and services. But have you wondered if VAT is something that relevant for a small business owner? Is it even required by you? And what are the pros and cons of VAT registration?
As a small business owner, understanding VAT and navigating its landscape can be a significant challenge. Due to the complexities of VAT laws, it can quickly become an overwhelming task to keep a check and balance on whether you are charging as well as claiming the VAT correctly.
We’ll help by answering some of the questions frequently asked by our small business clients regarding VAT in this article.
What is Value Added Tax or VAT?
VAT is short for – ‘Value added tax’. It is referred to a small percentage charged on certain goods and services paid for by consumers throughout UK and Europe. The Standard VAT rate charged on most goods and services in the UK is 20%, it can vary for some goods and services.
Do I need to register for VAT?
Most start-ups and small businesses automatically assume that they would have to be registered for VAT, but the truth is that you only NEED to be VAT registered if your annual or next 30 days turn over meets the VAT threshold. Current threshold for VAT registration is £85,000 or more of VAT-able goods or services (i.e. those not exempt or zero-rated), if your turnover is below this threshold then you have the choice to be VAT registered or not.
There are of course both pros and cons of registering and not registering, as you read on you can gauge an idea of what they are and you can make the decision accordingly.
How can you register for VAT?
If your business meets the minimum VAT threshold then you are legally obligated to be registered.
Most businesses can simply apply for registration online on the HMRC website. Once your online registration is complete, you’ll be registered for VAT and create a VAT online account (sometimes known as a ‘Government Gateway account’).
You will need this to submit your VAT Returns to HM Revenue and Customs (HMRC). You will receive your VAT certificate within or after 30 days of registration on your online account or via post (if an agent registers on your behalf or you have not registered online).
Which Items and Services do you charge VAT?
Most items and services you purchase even as a business will have VAT included in the price charged. And you also might be selling goods and services that require VAT being charged on them. To determine whether your product or service falls in the VAT chargeable category you can look at the list on the HMRC here.
Working out the complexities of how much VAT you were charged by your suppliers, how much you charged your customers and how much you need to pay (or reclaim) from HMRC can be a challenging act.
Advantages of being VAT registered
With the threshold being or exceeding £85,000 to be legally obligated to be VAT registered, for a small business not meeting the threshold , VAT registration is voluntary. If you are small business contemplating VAT registration below are some of the pros of being registered to help your consideration:
VAT can be applied to sale of certain products and services
Increased cash flow – You can benefit from an increased short term cash flows as VAT has to be paid quarterly to HMRC.
Any VAT you paid for purchasing a products or services from other businesses you can reclaim.
Being VAT registered automatically provides a sense of credibility to your business, and more often than not individuals and businesses prefer dealing with a business that is VAT registered, than one that isn’t.
Being VAT registered doesn’t reveal your businesses turn over, but having a VAT no. on your company receipts and stationary can give an impression of your businesses not being ‘too small’.
Disadvantage of being VAT registered
If the following cons outweigh the pros mentioned above, then you should of course consider registering. Though if your company does not have a turnover that exceeds £85,000 you shouldn’t worry about the following, seemingly disadvantageous, points relating to VAT registration.
Some of the businesses (suppliers) you work with might not be VAT registered, hence you cannot reclaim VAT for items purchased from them. Which can result in an increase in the price of your product, and make you uncompetitive.
If you generate more VAT from products and services that you sell compared to the VAT that you have paid on products and services purchased from other companies, HMRC can slam you with a hefty bill.
Being VAT registered means A LOT of paperwork. You have to be extremely stringent about recording and documenting your VAT receipts and invoices and have to submit your VAT returns every 3 months. This can be a headache if you are trying to do it yourself.
What can you claim in a VAT return?
You can claim backdated up to 4 years’ from your registration worth of VAT on equipment you bought for business purposes. For services the period is shorter, 6 months before the date of registration. Certain criteria’s may apply
You need all the relevant receipts and invoices, along with explanation on how the purchases relate to your business to be able to reclaim VAT. It is best that you apply for reclaim the above mentioned on your first VAT return.
Any special schemes that will help start-ups and SME?
Once you’ve registered, you’ll need to choose a system to tell HMRC
VAT you’ve charged
VAT you’ve paid
There is a standard VAT accounting method that you can use to file your VAT return, but there are various schemes or methods you can choose from to suit your business needs such as;
Annual Accounting VAT Scheme
Flat Rate Scheme
Cash Accounting scheme