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VAT – what’s that? The no-nonsense guide for small businesses

Updated: Mar 18, 2021

VAT (Value Added Tax) – we know, it’s hardly an exciting topic (are you still with us?!) but it’s an important one to get to grips with. Many businesses find VAT confusing and worry about what they need to do in terms of notifying HMRC. That’s where we come in.

We’re here to explain VAT and what it means for your small business by answering some of the most commonly asked questions (we promise it’s not as bad as it seems!).

What is VAT?

VAT is a sales tax added on to goods or services.

VAT is most commonly charged at the standard rate - currently 20%, but in certain sales, the reduced rate or zero rate is used.

How does VAT work?

VAT is charged to your customers when they buy your goods or services (output tax), while you reclaim VAT from business-related purchases you make (input tax). Broadly speaking, if the output tax is more than the input tax you pay the difference to the HMRC - if it’s the other way around the HMRC pay the difference to you.

Do I have to register?

You must register for VAT if your total sales go above the taxable threshold, currently £85,000, in a 12-month period (must be done within the following month). Remember, that’s based on your turnover, not your profit. You must also register if you know you’re going to exceed the threshold within 30 days. You can voluntarily register before you reach the threshold – here are the main positives and negatives.

What are the positives and negatives of choosing to register?

The positives

  • It gives the impression you’re established, even if you’re a small business

  • It opens up opportunities to work with businesses who only deal with VAT registered businesses

  • You can reclaim VAT on purchases made

The negatives

  • The extra admin involved with paperwork

  • Potential cash flow issues

  • It could be off-putting to suppliers or businesses who aren’t VAT registered and can’t reclaim tax

What are the legal obligations of registering?

There are four key things you need to do:

  1. Charge VAT

  2. Keep records

  3. Submit returns

  4. Pay outstanding VAT to the HMRC (source: HMRC)

Did you know...? You can claim the VAT for certain purchases you made before you were registered.

How do I register?

You can register online, by post using a VAT1 form (for businesses in the UK), or via your accountant. Get in touch if you need our help.

What are the different types of VAT schemes?

In most cases, businesses complete a tax return every three months. But there are other schemes which might suit your business better, such as:

  • VAT Annual Accounting Scheme – you submit one tax return a year which is paid in advance and based on your previous tax payment

  • VAT Cash Accounting Scheme – you only pay VAT when you’ve been paid, but you still pay VAT on invoices you’ve issued (even if you haven’t received payment)

  • VAT Flat Rate Scheme – you pay a flat rate of VAT based on the percentage of sales

Which one is best suited to my business?

It depends on factors like the size and type of business – take a look at the HMRC website for more information or speak to your accountant who can give you tailored advice.

How should I manage my records?

Organisation is key! You need to keep a record of all paperwork that’s related to sales and purchases, whether it’s printed, electronic or stored on accounting software. Not sure whether you need certain paperwork? Keep hold of it and check with your accountant.

What information will I need to be able to submit my VAT return?

You’ll need your VAT number and an online account. You can do this directly on the HMRC website or using accounting software. If you’re working with an accountant, you can authorise them to do it on your behalf.

Did you know…? You need to keep hold of all VAT records for at least six years.

What if I want to de-register? When and how do I do it?

You can ask the HMRC to de-register your business, provided your taxable sales fall below £83,000 (the current de-registration threshold).

If you’re no longer eligible you must cancel your registration within 30 working days.

‘Making Tax Digital’ is on its way

The government is changing the way VAT registered businesses store and report records. From April 2019, you’ll need to do it digitally and send updates to the HMRC every three months.

If you have any further questions about VAT, feel free to get in touch and we would be more than happy to advise you about your business.

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