The world of VAT can be a confusing one where the line can become blurry for some businesses. It's so often misunderstood among small businesses as a result.
Whilst some businesses are legally obliged to, others are free to volunteer their registration. If you've caught yourself questioning whether you should register your business for VAT, this blog is for you. We'll weigh up the pros, cons and legal requirements when it comes to VAT.
Value Added Tax is a sales tax charged on the value of goods or services supplied to a business' customers.
The standard rate of VAT is 20% although certain items are charged at slightly lower rates. For example, gas and electricity are charged at 5%.
When you have to by law.
Legally, you must register for VAT if your taxable VAT turnover is greater than the threshold of £85,000. Please note this applies to turnover not profit, i.e. every sale that is not VAT exempt.
Each month we advise keeping a track of your VAT taxable turnover. This may be the same as your sales figure but take a look at gov.uk for more guidance. Then maintain a running total for the current month and preceding 11 months. When this total reaches £85,000, you will need to register by the end of the following month. This applies to any 12 consecutive months, not just those of your financial year.
For example if your VAT taxable turnover was higher than the £85,000 threshold in June, you would need to register for VAT by the end of July.
Register immediately if you believe your VAT taxable turnover for your current 30-day period alone will exceed the VAT threshold.
Most businesses will then be required to complete their VAT returns quarterly to HMRC, usually within 37 days of the end of the previous period. Payment is required at the same time. As of April 2019, VAT returns are now done digitally through 'Making Tax Digital'. Find out more here.
If your VAT taxable turnover is under £85,000, you have a choice and may voluntarily register.
When it's a good idea...
When reclaiming
VAT is charged on the goods or services you produce, this is known as output tax. However, you can also reclaim VAT you pay on goods or services which is your input tax. As long as your input exceeds the output you'll be able to reclaim the difference from HMRC.
If you're building an impression that you are ready to grow
Businesses understand the VAT taxable threshold is £85,000. If you don't register for VAT, your turnover must therefore be lower than this threshold. To increase standing among competitors, some businesses opt to register for VAT to build the impression of a larger company.
When it's not a good idea...
It could be costly
On the other hand, the reverse can take place to our first point. So, if your output tax exceed your input, you will have to pay the difference to HMRC. This can cause cashflow problems as businesses can't accurately predict purchases and sales in advance. This could lead to a nasty surprise of a bigger-than-expected tax bill.
When the paperwork piles up
Filing for VAT is done quarterly so returns are made more frequently than other tax returns. The process contributes to more 'paperwork' too with VAT accounting now added to existing bookkeeping and reporting in your finances.
Be careful of further penalties for late filing or payments too!
Implications for Customers
The final aspect to consider is that of passing on the higher prices to current customers. Will you choose to include it in your prices or hand it over to the customer to pay on top of your current packages?
We hope this has given you some clarity and guidance with your decision making process. For more information on VAT schemes, tax calculations, record keeping or even general business advice, get in touch with Catherine today. Give her a call on 01423 431889 or email catherine@bctaccountants.co.uk.
Please note: all stats are accurate for the 2019/20 tax year.