Your Guide to VAT and Your Business
Value Added Tax is one of the most confusing taxes to understand, with complicated rules and thresholds that make it an area fraught with dangers and pitfalls for small businesses. In the blog below we answer some of the most frequently asked questions on the subject.
What is Value Added Tax?
Value Added Tax (VAT) is a tax added to goods and services sold. This can include selling business assets, hiring and leasing of goods, commission, and reclaiming VAT on business expenses where applicable.
To Register, Or Not to Register…
You must register for VAT when your turnover reaches or exceeds £85,000 per annum. This applies if you expect your Annual VAT turnover to be more than £85,000 in the next 30-day period (it is not confined to a set 12 months). Think of it like this:
If, at the end of a calendar month, the taxable sales over the last 12 months exceeded £85,000 then you would need to register for VAT.
Equally, if you expect your 12 months sales to exceed £85,000 in the next 30 days, then you must also register. You must notify HMRC within 30 days of that date. For example, if you received an order worth £86,000 on the 1st August, you must register for VAT by 31st August.
My turnover isn’t at £85,000, should I register anyway?
It can be beneficial to register for VAT even if you are not near the £85,000 threshold. This might be because you are likely to be able to reclaim more than you would pay, or to widen your business community (some businesses will only do business with VAT registered companies). If you’re not sure, speak to your accountant, who should be able to walk you through the pros and cons. If you are starting out in business and setting prices, and you believe your turnover may reach the turnover level quickly, it might be best to to incorporate the added tax from the outset.
VAT rates and exemptions
Most VAT is standard rate at 20%, but there is Reduced Rate (5%) – which is for items such as child car seats, domestic fuel, certain building projects, etc – and finally, Zero Rate (0%) which applies to children’s clothing, food (not in a restaurant) and a few other items.
Some services are VAT exempt, such as education, charitable fund-raising, most property rentals, insurance and finance services.
How to Submit VAT Returns
Once you are VAT registered you file VAT returns quarterly. This includes filling in the amount of your input and output VAT. Input is the VAT you have been charged by others for their goods or services. Output is the VAT you have charged to your customers or clients for the goods and services you have rendered.
These amounts are calculated and result in either a net payment to HMRC or a repayment from them.
This process repeats every quarter (or you can opt for monthly returns) and you can choose your quarters to coincide with your business’s financial year end. The deadline for submitting and making your payment is one month and 7 days after the last day of your quarter (or month).
(See also, Making Tax Digital below)
Can I reclaim VAT?
One of the advantages of registering for VAT is that you can reclaim VAT on some of your costs. It should be possible to reclaim for goods and services such as:
- Mobile phone tariffs used for business
- Business vehicles, including fuel and maintenance
- Utility bills
- Software and IT costs
- Accountancy fees
- Goods for resale
If you are newly registered for VAT you can reclaim on items that have been previously purchased, such as hardware, machinery or office furniture. Speak to your accountant about what your options are or contact us on 0208 819 8762.
There are various HMRC schemes that are designed to ease registration for small business, such as Flat Rate Scheme, Annual Accounting Scheme or Cash Accounting. Your accountant should always advise you on the best option for your business and whether you qualify for these schemes.
Canceling VAT Registration
If your turnover drops to below £83,000 then you can cancel your registration. But it’s worth speaking to your accountant for advice. It can be advantageous to stay registered when; you regularly reclaim VAT or if the majority of your customers are VAT registered. Always consider whether the drop is a temporary blip or a permanent adjustment. You must keep your records of 6 years after de-registering.
Making Tax Digital
HMRC’s Making Tax Digital Initiative began with VAT in April 2019. This means that you must submit your VAT return digitally and keep electronic records. Your accountant can guide you on this. Here at Artisan we use HMRC MTD approved software Xero, to make sure our clients are compliant. If you’re not already using cloud accounting software speak to your accountant about switching immediately. After an initial learning curve you’ll find the ease of use and the advantage of clear, up to date financial information a game changer for your business.
That covers the main VAT questions we receive, but if you still have a question, or if you need more information give us a call here at Artisan Accounts on 020 8819 8762 or email us at [email protected] with your query.
For more information about VAT rates for goods and services visit HMRC