How does VAT work?
If you are a VAT registered business, you must charge VAT on any goods and services that are subject to the tax, at the appropriate rate – usually 20%. This additional income obviously isn’t for your benefit – you are effectively collecting the tax for HMRC and need to submit it every 3 months.
On the plus side, when you make purchases from other VAT registered businesses, you can claim the VAT back.
An overview of all the official information on Value Added Tax can be found by clicking here.
Most popular VAT Schemes
If you’re a small business, there are several ways that you can account for VAT. These are designed to help you save time and money, and which one you choose will depend on your business set-up.
Annual Accounting Scheme: Equal payments are made quarterly or monthly, and are based on the previous year’s total VAT liability.
Cash Accounting Scheme: VAT liability is calculated on the basis of payments made and received, rather than invoices sent and received. This can be a big help for cashflow.
Flat Rate Scheme (FRS): While you charge normal VAT on your taxable products and services, you pay a flat percentage rate which is lower than the standard 20%. The exact rate you pay is determined by HMRC and depends on the industry sector you are in. You cannot claim VAT back on any purchases you make. Simple to administer, this scheme could be financially attractive, but it may not work for every business – check with your accountant.
When do I have to register?
VAT registration is compulsory for all types of business once you reach the VAT threshold. This is determined each year in the Budget – for the 2016/17 tax year it is set at £83,000. Details on VAT registration procedures can be found here.
Put simply, if your turnover of taxable goods and services over the previous 12 months – on a rolling 12 months basis, not a calendar year – exceeds the VAT threshold or if your taxable turnover is expected to go beyond the VAT threshold in the next 30 days, you need to be VAT registered. Failure to do so can result in fines.
Additional VAT registration requirements may apply to your business if you are an importer – ask your accountant for details.
If you can show that your turnover is only temporarily over the VAT threshold, you may be able to obtain an HMRC exemption from tax registration. Similarly, if your taxable income falls below the VAT deregistration threshold (£81,000 from 1 April 2016), you may be able to deregister.
Could I become VAT registered voluntarily?
Yes, you can. Indeed, if your turnover is below the VAT threshold, there may be good reasons to register voluntarily. Quite apart from the possible financial advantage (do check the figures!), being VAT registered may boost your company’s image and credibility.
It is often the case that clients, suppliers or investors will feel uneasy doing business with a company that is considered too small to be taken seriously. Being VAT registered will give you the necessary heft to be considered a credible, established player in the marketplace.
Many businesses dread the prospect of added admin and paperwork that come with VAT. However, as long as you have proper systems and resources in place, this need not worry you unduly. Up-to-date accounting software is able to deal with any VAT processes with ease, while your accountant is on hand with expert guidance and advice.
Article provided by Mike James, an independent content writer working together with Wellden Turnbull, a Chartered Accountancy firm based in Surrey.