VAT is one of the most essential components of business tax to get right. It can pose challenges in terms of accounting. It can also affect your profitability. So getting the best tax advice for your small business is about more than simply maintaining compliance with HMRC, it is a fundamental element of managing all small businesses successfully.
Getting the Best VAT Advice for Your Small Business
We know that managing VAT can sound daunting, but it doesn’t have to be! Our comprehensive, free VAT guide has lots of advice and guidance to get you started. Whether you need information on registration, submitting VAT and staying compliant. Or simply some of the common VAT terms explained, it’s all here. Discover if and when your business needs to register for VAT, how to submit your VAT returns to HMRC and how to choose the best VAT scheme for you. This guide also gives you everything you need to know to stay compliant and explains all the common VAT terms in straightforward language, so now you will know if you are getting the best tax advice for your small business.
What is VAT?
Value added tax (VAT) is a tax on most goods and services which is levied at the point of sale. This means that you pay VAT to the supplier when you buy their goods or services. VAT is set at a standard rate by His Majesty’s Revenue and Customs (HMRC). This is paid on top of the value of the item, increasing the retail price you pay for everything that is subject to VAT. If your business is VAT registered you will also have to charge VAT to your clients. Plus you can claim back the VAT you have paid to your suppliers. This means managing a fine balancing act between these two amounts, to keep your business profitable.
To VAT or Not to VAT
You will pay VAT on most goods and services. However to reclaim VAT you need to be VAT registered. Plus if you are VAT registered you must also charge VAT on your goods and services. If your business turns over more than the VAT threshold of £85,000 per year then you are legally required to register for VAT. If your annual turnover is less than this threshold, then you can decide whether or not to register for VAT. If this is the case and you are free to choose, there are pros and cons to consider before registering for VAT. Prestige Business Management can help you calculate what will be most profitable for your small business. Here we explore getting the best tax advice for your small business.
When NOT to Register for VAT
Mainly this choice will depend on whether or not you spend more on VAT-able items than you can charge VAT on your products and services. However a byproduct of VAT registration is that registering or VAT with HMRC lends legitimacy to your business. Which may be especially useful if you are a start-up with little in the way of testimonial evidence to demonstrate your credibility. Yet there can be disadvantages to being VAT registered if your taxable turnover is under £85,000. The most obvious is that you’ll have no choice but to charge VAT on your taxable products or services. This drives up the cost passed on to your clients. Or alternatively you freeze your prices and reduce your profit margins. Or you can calculate how to manage a combination of both these outcomes. Depending on your business model this cost may negatively affect your profitability. In which case it will make more sense to remain unregistered, unless you pass the VAT threshold, in which case you will be legally required to register for VAT. The other consideration to VAT registration is the administrative commitment. You will have to submit VAT returns quarterly, monthly or annually, and to ensure these are accurate you will need to hire an experienced accountant.
Why are there Different VAT Rates?
Most goods and services are subject to the standard VAT rate of 20%. However, some products and services are taxed at a reduced rate (5%), zero rate (0%) or exempt from VAT altogether. This is usually because it is classed as an essential product or service. Some exempt goods and services include:
- Sporting activities and physical education
- Training and education
- Some medical treatments
- Financial services, investments or insurance
- Food and drink (except alcohol, which is subject to the standard 20% rate)
You cannot charge or reclaim VAT on any exempt items. Sales of VAT-exempt goods or services are not included in your VAT taxable turnover, meaning you don’t need to keep a VAT record for these items. If your business only sells products or services that are exempt from VAT, then you cannot register for VAT and so cannot reclaim the VAT charged by its own suppliers. However, if you sell zero-rated products or services, you can still register for VAT and reclaim any VAT charged by your suppliers, even though you will not charge VAT. VAT accounting can become more complicated if your small business offers a mixture of goods and services that are zero-rated and some of which are exempt. For example, you couldn’t reclaim VAT on sporting goods that you have purchased to deliver a physical education session, because physical education is VAT exempt. Whether you offer a standard set of services that are VATable at the standard rate, or a wide range of items that fall under standard rate, reduced rate, zero rated and exempt from VAT. All of these will need to be carefully accounted for so that the correct amount of VAT is reclaimed and you maintain compliance with HMRC. Fortunately our expert accountants can guide you through this.
How to Register for VAT
You can register for VAT online with HMRC. Remember that you are legally required to do this if your VAT taxable turnover is over £85,000. Once registered you’ll receive a VAT registration certificate. This confirms your VAT number and when your first VAT return and payment will be due. Once you’ve submitted your application, you can expect to receive your certificate in around one month. However, you need to begin keeping records immediately so you can account for VAT from your date of registration. You can make backdated VAT claims on products or services you bought before registering for VAT up to four years prior to the date of registration, as long as it was paid on items you still own or that were used to make items you still own. There is a shorter deadline for services. You can only reclaim VAT for services received up to six months before the date of registration. All such goods or services must be for the purposes of the business that you have registered for VAT. Reclaim these on your first VAT return and keep the relevant invoices or receipts, along with a record of how these purchases relate to your business.
Do I need an Accountant to Calculate my VAT?
The choice is yours. If you feel familiar enough with VAT you can file and pay your VAT in house. What you need to remember is that you are legally required to report your VAT obligations accurately. This can quickly become unwieldy for a small business. Unnecessary mistakes will reduce your profit margins, or even worse, trigger a tax investigation. One area to pay attention to, is that it can be hard to prove when and how goods and services are for business use. This is even more difficult if these lend themselves to personal use too. One example is calculating how to split the VAT on the cost of WiFi or other utilities if you work from home, some or all of the time. To save yourself time and money on this administrative burden we recommend that your accountant takes care of VAT, since they will be able to do this for you expertly and accurately, eliminating the risk of mistakes.
What Can you Reclaim VAT on?
You can only reclaim VAT on tax deductible expenses that are used specifically for your business.
Some common goods and services you could claim back for:
- IT equipment – hardware, software and services
- Premises – rent, insurance and utility bills
- Stock – goods for resale, or materials
- Professional services – legal, financial etc
- Travel – tickets, fuel and accommodation
The Process for Reclaiming VAT as a Business
You need to submit a VAT return to HMRC to claim your refunds. As well as recording the VAT you have paid, you need to record the VAT you have charged to your clients. HMRC requires proof of purchase, you can provide in the form of a valid VAT invoice or a receipt from the retailer which contains the VAT charge. You will also need to be able to prove that it was for business use.
Prestige Business Management Works for you
Prestige Business Management can provide custom VAT advice and support services for small businesses. We can help you choose the right model of repayment, whether quarterly or annual repayments are most suitable. We will ensure that your VAT obligations are compliant. We can help educate you about key VAT procedures and help you educate your business staff in helping to promote good VAT procedures. Find out what we can do for you. Call us today on 0203 773 2927.