The decision to register for VAT (VAT Registration) is often fraught with fear for a lot of small business owners. They think that VAT is extremely complicated and overly bureaucratic, and there is some truth to this. Sausage rolls are a great example of this. If you sell sausage rolls hot, whether you charge VAT is dependent upon whether you keep them hot via a hotplate for example, in which case you would charge VAT, or leave them to cool after baking them, in which case you wouldn’t charge VAT.
The purpose of this blog is to allay some of those fears and set out strategies for small businesses to successfully manage their VAT compliance.
What Is VAT?
VAT (Value Added Tax) is a tax collected on behalf of HM Revenue and Customs (HMRC). It is a tax that is levied against goods and services. The standard VAT rate is 20%. There is a reduced rate of 5%, and a zero rate of 0%. The taxes collected on most items will fall under the standard rate, while certain companies like energy services may be at a reduced rate. Now, you may be wondering why you’d want to register to collect a tax when you don’t have to. The truth is that many businesses would benefit from voluntary registration for VAT.
Firstly the £85,000 threshold for compulsory VAT registration is seen by many small businesses as a ceiling which they dare not breach, believing that it will mean that their prices will have to increase by 20% and that this would make them uncompetitive. If your business primarily deals with other businesses then this may not be an issue as they will be able to reclaim the VAT element.
However, if you’re primarily dealing with consumers then there is an element of truth to this. Prices may have to rise by 20% as experienced by the end customer, whether this will make your business uncompetitive or not is a separate matter as:-
“People do not buy on price, they buy on the value they receive for the price they pay.”
Secondly, there is a belief that there is a heavy element of administrative work required to maintain compliance with the VAT scheme. Of course, you will need to maintain good records of both sales and purchases if you are VAT registered. However, this should be standard business practice anyway, and with the tools available free of charge from your bank and others, it’s relatively easy to quickly snap a picture of a receipt and for that information to be transferred into an accounting system.
There is a need to submit quarterly VAT returns and pay the required VAT that you have collected on behalf of HMRC, but again any good bookkeeper or accountant can make this task relatively pain-free (If you’ve kept up with the records). I always recommend that you set up a separate bank account for the VAT element that you receive. You should deposit the VAT element into this account and view it as ‘not your money’. It’s the government’s and they can get nasty if you spend it.
Here are 3 benefits of being VAT Registered.
1. You May Receive VAT Refunds.
The amount of VAT you pay depends upon your sales revenue and the amount of VAT you can reclaim from your purchases (when your business purchases goods, you can reclaim VAT on them). If your business has had significant expenses throughout the year, the amount you can reclaim may be large. When you submit your VAT return after these charges you may see a substantial refund! If for example you’re in the process of setting up a new business and have large capital expenditures then there could be a substantial VAT refund coming your way.
2. How your business is viewed by others.
The simple fact is that businesses that are not VAT registered are viewed as small “mom & pops” and not really serious businesses. So becoming VAT registered can be one of the largest benefits you can reap. A VAT-registered business appears bigger. Even if you’ve not reached the threshold for compulsory registration, it still reflects the same. People are aware that businesses that undergo compulsory VAT registration are bringing in more revenue. This simple registration process can make even the smallest limited company appear to be a large corporation. The VAT threshold is at least £85,000, and being VAT-registered will signal to some that your business brings in that much.
Additionally, it can increase business overall. Some businesses prefer to work with VAT-registered businesses. They’ll turn away any non-VAT registered businesses in search of other suppliers. Being VAT-registered tells other businesses that you can send valid VAT invoices. This is an important part of business-to-business operations. Larger businesses know that VAT-registered businesses can send these relevant documents without issue.
3. You Can Claim Past VAT.
Following the VAT registration process, your business may be able to claim VAT from the last 4 years. To reclaim this, the items must still be in use. Depending on what kind of business you’re running, this may result in a substantial return. To be able to claim this, though, your business will have needed to exist for those 4 years. You’ll also need to be able to provide VAT invoices and records from that period of time.
Different VAT Schemes.
There are a number of different VAT schemes which are designed to simplify the way some VAT-registered businesses calculate and account for VAT to HMRC. They do not change the amount of VAT businesses charge for their products and services. Which one is appropriate for you and your business depends on many factors, you really should seek expert advice before selecting the appropriate scheme. Here we describe the two most common schemes for small businesses.
Standard Accounting Scheme.
Under the VAT Standard Accounting Scheme, businesses submit a VAT Return four times per year. Any VAT you owe must be paid quarterly. Similarly, any VAT refunds you are due will also be repaid quarterly. How much VAT you should pay or be refunded is calculated by comparing the amount of VAT due on your costs and the amount of VAT owed on your sales. If the amount for sales is higher than the amount for costs, you should pay HMRC the difference. If your costs are higher than your sales, HMRC will refund you the difference.
The Standard VAT Accounting Scheme follows the principles of accrual accounting – meaning that financial activities are reported as they occur, regardless of when the payment is completed. Within the Standard VAT Accounting Scheme, financial activity is considered to occur on the date a VAT invoice is issued. Income is reported when you raise an invoice for a customer and expenses are reported when you receive an invoice from a supplier.
As such, when filing a VAT Return using this scheme, VAT correlates to the quarter in which an invoice is received or raised, regardless of whether you make or receive payment in a different quarter.
VAT Flat Rate Scheme.
The VAT Flat Rate Scheme lets you work out what you owe HMRC in VAT as a percentage of your gross turnover. You can only use this scheme if you’re a small business with an annual taxable turnover of £150,000 or less excluding VAT.
With the Flat Rate Scheme, you pay a fixed rate of VAT to HMRC and you keep the difference between what you charge your customers and pay to HMRC. You cannot reclaim the VAT on your purchases – except for certain capital assets over £2,000. For example, a food takeaway would pay a flat rate of VAT of 12.5% (note they would still have to charge the standard rate of VAT on their goods for sale). When you register for VAT under the flat rate scheme you will receive a 1% discount for the first 12 months, our example takeaway would pay 11.5% for the first 12 months of their VAT registration and move to 12.5% thereafter.
Registering for VAT doesn’t have to be difficult or a competitive disadvantage if you get the right advice early enough in the process. Call Rule 29 on 01482 408585 or drop an email to firstname.lastname@example.org for a FREE informal chat about how we can help you overcome the VAT registration challenge.