Whether you are a seasoned pro or a tax ‘newbie’, VAT can cause headaches for business owners. From VAT schemes and registration to Making Tax Digital and exempted goods and services, VAT can cause even the most experienced entrepreneur to slip up from time to time.
So, what’s the deal with VAT? In this blog, we’ll answer some of the most common questions we hear from small business owners just like you.
When do you need to register for VAT?
A business must register for VAT when its taxable turnover exceeds £85,000 in any consecutive 12-month period, or if you know it will in the next 30 days.
Remember, your VAT taxable turnover is the total of everything sold that is not VAT-exempt. You would also include any services purchased from non-UK suppliers under the new VAT Reverse Charge scheme.
There are also opportunities to voluntarily register for VAT. We’ve explained why this might be a good idea below.
What are VAT accounting schemes?
There are several VAT accounting schemes available, each designed to simplify the tax regime (see, even HMRC knows it’s complicated!).
The most common schemes are as follows:
- VAT Cash Accounting (taxable turnover of £1.35 million or less)
VAT is paid on a receipts/payments basis rather than a day book basis.
- Flat Rate VAT Accounting (taxable turnover of £150,000 or less)
VAT is calculated as a percentage of turnover. A special rate is set per industry except for:
- Limited Cost Trader
Pays VAT at a special rate of 16.5 per cent if the cost of direct goods and services is less than two per cent of turnover, or, if above two per cent, less than £1,000 per annum.
- VAT Annual Accounting Scheme (taxable turnover of £1.35 million or less)
Completes and files one VAT return per annum with payments made either monthly or quarterly throughout the year.
- Retail and VAT margin schemes
Simplified VAT schemes specific to the retail and other niche sectors.
How do I register for VAT?
Most businesses can register for VAT online here: https://www.gov.uk/vat-registration/how-to-register.
Your accountant or agent can also sign up on your behalf.
Some businesses must register by post. Find more on this here.
What are the advantages and disadvantages of registering for VAT?
If your business earns less than the VAT threshold, you may wish to register voluntarily.
Why? A VAT-registered business can give the appearance of a big and established company, even though yours is actually a small outfit. This will have benefits both domestically and internationally. Registering for VAT will also allow you to reclaim the cost of VAT on certain goods, and, if your customers are also VAT registered, not create an additional cost to them.
The primary drawback, however, is the additional accounting and administration burden. Most VAT-registered businesses must submit quarterly tax returns using digital software, which may be outside the realms of their skillset or resources.
Before registering for VAT, it is always best to first seek advice from a professional.
If you are lucky enough to earn more than £85,000, you don’t have the luxury in choosing whether you want to sign up or not. However, you can choose to enrol in a VAT accounting scheme, which may simplify and reduce the burden of reporting VAT. Again, it’s best to seek expert advice before registering for a scheme.
What does Making Tax Digital (MTD) mean for my business?
Under the new digital tax regime, almost all VAT-registered businesses earning above the VAT threshold (currently £85,000) need to keep their records digitally and submit their VAT returns using MTD-compatible software.
To your business, this may mean investing in a software package and training staff to use it.
To find compatible software, click here.
How much VAT should I charge on (XYZ)?
There are three different rates of VAT, which explains why things can get so complicated. These are the standard rate, reduced rate and zero rate. The standard rate is charged on most goods and services, while the reduced and zero rate is charged on special goods and services. A full list of reduced or zero-rated goods and services can be found here.
Meanwhile, some goods and services are classified as VAT-exempt, meaning no VAT is charged and they are not counted in your VAT-taxable turnover.
This means that if your business only sells VAT-exempt goods, it does not need to register for VAT – even if its turnover is above the £85,000 threshold.
Want to know more about VAT? Get in touch with our VAT team now.
Smailes Goldie Group
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