VAT. Not the most exciting topic in the world, but it’s perhaps the one we are asked most about. Almost every small business owner is at some point faced with the decision, or dilemma, of whether or not to become VAT registered. We’ll try to cover all that you need to know about VAT registration in this article including when to register for VAT as a small business in the UK.
What is VAT?
Value added tax or VAT is a general sales tax added to most goods and services. Businesses that charge VAT on their goods, then pass on the taxes they collect via their sales to the government.
The standard rate of VAT in the UK is 20%. Some goods incur a reduced rate of 5%(children’s car seats and home energy) and others are zero rated (most food items and children’s clothes) and then there are many exemption categories too (insurance being just one example).
What is VAT registration?
VAT registration is the process of listing your business with HM Revenue & Customs (HMRC) to get a VAT registration certificate and number. Once you have done this you are required to charge the right amount of VAT on your products and services, submit VAT returns (reports) to HMRC and pay any VAT due to HMRC as calculated in your returns.
When Should I Register for VAT?
VAT registration is totally voluntary if your business turns over less than £85k in a year. You must register your business for VAT if its VAT taxable turnover is more than £85k. The same rules apply whether you are a Limited Company, Sole Trader or Partnership.
If you are a sole trader with turnover at this level you may wish to consider moving to a limited company structure - see our previous blog about becoming a limited company.
You must register for VAT if:
you expect your turnover to be more than £85k in the next 30 days
your business had VAT taxable turnover of more than £85k in the last 12 months
This turnover figure is a rolling 12 month period - a common mistake is to look at the turnover in the year end accounts rather than a rolling 12 months, business owners are then surprised to find they went over the threshold several months ago. This can be an expensive mistake as they then must pay back dated VAT to HMRC.
What Are The Benefits Of Being VAT Registered?
Even if you do not meet the £85k threshold, you can still register voluntarily to become VAT registered (unless everything you sell is in the exempt category. There are some benefits to this:
Being a VAT registered business does provide some level of reassurance to your customers that you are maintaining good records and are a solid business with a substantial turnover.
Your VAT registered business customers can claim the VAT you charge on invoices back.
As a registered VAT business, you can reclaim any VAT on goods and services you have bought for your business thus reducing the cost by around 20%.
Once VAT registered, you can go back and reclaim VAT for up to four years on goods and six months on services that you have purchased if you have suitable evidence and are still using them in your first VAT return.
Being VAT registered does force you to keep good records which tends to have a very positive impact on the entire business.
What Are The Downsides of Being VAT Registered?
VAT registration is not for everyone (unless you have hit the threshold, then I’m afraid it’s compulsory). Before you rush in to voluntarily register for VAT it is worth considering what this will mean for your business.
You will need to increase your prices by the VAT amount you are required to charge (up to 20%). This won’t be an issue for customers that are themselves VAT registered as they will reclaim this cost, but for small businesses or consumers, that will be pretty ouchy.
There is a burden on you to maintain good financial records and submit timely VAT returns and payments.
There are significant penalties if you fail to maintain accurate records or are late submitting returns and payments.
Simple VAT returns can be managed yourself if you are sharp, but we would always recommend using a good software package such as Xero and perhaps also a bookkeeper as well to ensure that you are on the right track. Whilst this is an additional cost, it is often the case that it can be an investment that can save you money in the end, due to the additional financial oversight this offers you as a business owner.
Are there any VAT Exemptions for Small Businesses?
Yes, if you have not reached the £85k turnover threshold then you do not need to register for VAT. You can also apply for exemption if you have temporarily gone over the threshold and do not believe it will be maintained.
If your business provides goods and services that are VAT exempt, then you also do not need to apply for VAT registration despite the turnover threshold.
Does a Limited Company Have to be VAT Registered?
Nope, see above. Only if you hit the £85k turnover threshold. Just remember this is for a rolling 12 month period though!
Can a Self-Employed Person Register For VAT?
Yes. A self-employed or a sole trader may also voluntarily register for VAT but please do think carefully about the advantages and disadvantages of this (see our section above on this) and discuss with your accountant first. Once registered, you are required to charge, report and pay VAT! So you’ll want to be absolutely sure it is the right decision for you.
What are VAT Schemes?
VAT schemes are different methods of reporting what VAT you are charging and reclaiming to HMRC. There are several VAT schemes available and you will need to choose which one is best for you.
The main ones are:
Standard accounting - account for VAT based on the dates of your sales invoices and supplier invoices, submitting quarterly VAT returns. This is a pretty simple and straightforward method.
Cash accounting - account for VAT based on the dates you receive or make payments which can be good for businesses who have slow paying customers and need to be very careful with cashflow. Basically you do not want to pay the VAT due before you have received it yourself. However, this is only available for businesses with less than £1.35m annual turnover.
Flat rate - simply apply a percentage rate (rates differ according to what industry you are in) to your sales total. This keeps the bookkeeping very straightforward and in some cases can produce a financial benefit. This is only available for businesses with less than £150k turnover. But be careful as it’s easy to get the percentage wrong, especially if you are a limited cost business.
Annual accounting - like the standard scheme but instead of quarterly returns you just submit one return per year while making quarterly payments. This can be good for cashflow but you can end up over or under paying so you need to keep a good eye on the running total. This is only available for businesses with less than £1.35m annual turnover.
Construction industry reverse charge VAT scheme - this was introduced in March 2021. The rules on this get quite complicated, we recommend you speak with your Accountant if your business is in the construction industry.
How to Charge Customers VAT
Once you have registered for VAT and received your VAT certificate from HMRC you must add VAT to your invoices you send to your customers. The VAT must be clearly shown as well as your VAT registration number. Software such as Xero has great invoice templates set up to help you make sure you get this right.
You may have to wait a little while for your VAT number to arrive but need to send invoices to clients. You are not allowed to include VAT on your sales invoices until you have your VAT registration number but you can increase your prices by 20% to cover the VAT and then re-issue the invoices when your VAT number arrives, which is something we advise you to do with a clear explanation to your customers.
What's the Best Way to Stay on Top of my VAT?
If your turnover is over £85k and you are registered for VAT you must now use Making Tax Digital compliant software.
If you are not already using bookkeeping software this may feel like a bit of a leap but we actually recommend the use of software for businesses even if not VAT registered as it’s a great way to keep track and manage your business.
If you don’t feel confident with record keeping for VAT you can use a bookkeeping service to keep you above board.
Our experience is that once clients do become VAT registered and commit to good digital software and/or a bookkeeper, then their businesses thrive. The additional reporting requirements provide a level of self-scrutiny and discipline that really benefits a business. Good systems and support also free up business owners to focus on their key strengths - running and developing their business, not just managing their bookkeeping.
How do I Register for VAT?
You register on the government website here https://www.gov.uk/guidance/register-for-vat
But before you do, read this article again and have a think if and be sure that registering for VAT is right for your business. If you are still not sure, get in touch. We’d be happy to advise you and guide you through the process.
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