Value Added Tax (VAT) is not a beloved tax, it’s fair to say. It’s not beloved by the customers and non-VAT registered businesses who can’t claim it back on their purchases. It’s not beloved by VAT-registered businesses who have to administer and collect it. It’s often a very confusing area for business owners particularly when it comes to deciding whether or not to register your company for VAT.
In this article, the Sunny team looks at whether VAT registration is right for your business, what it means for your bookkeeping, and how you can make VAT work for your company.
What is VAT registration?
When you register your company for VAT, you are required to charge your customers VAT on all of the relevant goods and services you offer; usually at a rate of 20%.
VAT registered companies are then allowed to reclaim the VAT they pay out to their suppliers from HMRC. So, let’s say that you charged and collected £20,000 in VAT from your own customers in a quarter but have paid £4,000 in VAT to suppliers during the same period of time, you need to pay £16,000 in total to HMRC.
Do I need to register for VAT?
The threshold for VAT registration in the UK is £85,000. This mandatory limit means that if your total business turnover in the last twelve months exceeds £85k, you are legally required to register for VAT.
While this may sound like a lot to many small businesses, the VAT threshold is turnover-based. That £85,000 is the total income generated from all of your sales – not the profit you have made from them.
It is important to note that your turnover is calculated on a rolling twelve month time period rather than the tax or company year. As soon as you hit £85,001, you’ll be legally required to sign up. That’s why so many small businesses and limited companies can suddenly find themselves with no choice but to register for VAT.
One way to make sure you don’t get caught out by this is by implementing a simple system where you can log and monitor your monthly sales.
However there are also a number of companies choosing to pre-emptively opt in to VAT registration before they meet the legal threshold.
Why should I consider voluntary VAT registration?
Voluntary VAT registration is popular among entrepreneurs and small businesses looking to reclaim the VAT on their business’s own purchases.
If you do not meet the VAT threshold, then this decision about joining the scheme is entirely up to you. However, please be aware that some of your customers may not be too happy if your prices suddenly increase by 20%.
It’s likely your decision will rest on who your customers actually are. If you are a B2C company, a price hike may just drive some of your customer base to a competitor. However, if you primarily work with other VAT registered companies, it is unlikely they will care because they can recover any VAT you charge them from HMRC.
How does VAT registration work?
Once your business is registered for VAT, you will need to start filing VAT returns. You do this usually on a quarterly basis however you can choose to do this monthly or annually if you wish and under certain criteria.
In either case, VAT registration requires a great deal of organisation. You’ll need to make sure all of your business records are accurate and up to date. You will have to keep hold of all your VAT invoices and receipts too. Using an accounting software like Quickbooks and working closely with your Sunny accountant will make this whole process a lot simpler.
It is especially important that you keep your records in order in case you should come under investigation by HMRC. Unlike the requirement for corporation tax (where it is recommended you hold onto records for the last four years), VAT enquiries can go back as far as seven years.
As for paying the VAT bill, most companies do this on a quarterly basis. You are given around six weeks following the quarter end to send the money over to HMRC.
Sunny Accountants tip – VAT is moving over the new Making Tax Digital platform from April 2019.
How is VAT calculated?
When it comes to calculating VAT you will have two options.
The first is on a cash basis. With this, VAT is worked out using the cash transactions made in and out of your bank account. This is usually best if your customers have a habit of paying late but you tend to pay your suppliers on time. The cash scheme means you won’t need to pay any VAT until you have been paid.
You may instead choose to calculate VAT on an accruals basis. This is better when your customers pay you straight away but you don’t have to pay your suppliers until later on. You can reclaim VAT quicker this way and this is better for overall company cashflow.
What is the Flat Rate Scheme?
You may have already heard of the Flat Rate Scheme for VAT. Initially designed to simplify tax for small businesses, the flat rate scheme gives many companies the opportunities to make decent savings on their VAT bill with this scheme.
The Flat Rate Scheme divides companies into industrial categories which each have their own set VAT percentage. You can see the complete list of flat rates by business type on the gov.uk website.
Let’s say that your business provides computer repair services. The flat rate set by the government for this industry is 10.5%. In this case, you could continue to charge your customers VAT at 20% but would only have to pay HMRC the 10.5% of the VAT-inclusive total of the invoice you issue.
The trade-off companies make on the flat rate scheme is that they can only reclaim VAT on their large capital expenses worth over £2,000 (inc VAT). There are, of course, winners and losers on this scheme. It is certainly worth working out which VAT scheme would be most tax efficient for your company with the help of your accountant.
We can help
For all VAT enquiries relating to your business, including whether you qualify for the flat rate scheme and whether it’s worth your business joining it, speak to your Sunny accountant today. Please call us on 01623 559362 or email us on [email protected].
For a free chat on how we can help you, please complete the contact form below and we will be in touch.