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VAT, or Value-Added Tax, is a consumption tax, where the tax is applied to the purchases of goods and services of taxable supplies. It is seen as a regressive tax because it impacts the poorer more than the rich, due to the higher propensity to spend of the former group. Initially modelled on the EU-framework, it is now deeply imbedded in the UK, generating significant revenues for HMRC, so it’s unlikely we will see the back of it any time soon.
There are several ways you may become VAT registered. They include:
- Legislation – You are above the VAT threshold;
- Customer – requires it, otherwise they will not engage with you;
- Reputational – You want to appear bigger that you actually are; and/or
- Financial – You have a lot of VAT expenses, which you want to reclaim e.g., you are refurbishing an office.
You may not need to be VAT registered upon starting up, but you do need to keep an eye on your turnover and you can’t just leave it to your Accountant to resolve this at the end of the year.
The current registration limit is £85,000 (2019/20 tax year). What this means is if you expect to exceed this on a 12-month rolling basis in the next 30 days, or your turnover is more than this over the last 12-months, you need to notify HMRC, register for VAT and start charging your customers. If you don’t register in time, HMRC will ask you to pay the VAT on your gross sales, which you should have collected on behalf of your customers and may charge interest and penalties too, so it can quickly get painful!
How does VAT registration work
If, for example, you charge £100 per hour for your services, once you are VAT registered you essentially need to charge £100 + VAT per hour, or £120. However, don’t forget, the additional £20 is not yours. You are essentially acting as agents, collecting tax on behalf of HMRC. It is good practice here to transfer this amount into a separate bank account, so you have the money to pay HMRC as it falls due.
On a monthly, quarterly or annual basis, you then calculate the VAT you collected on sales and reduce this by the VAT you paid on expenses, to work out how much you owe HMRC, or indeed how much they owe you.
You also need to ensure you include your VAT number on your invoices, website and other business stationery.
Consequences of VAT for your business
One of the big implications to consider is how this will impact your business. Generally, if your customers are all businesses (Business-To-Business, or B2B), they are more likely to be VAT-registered themselves, so it will have minimal impact on your sales, as they can reclaim any VAT charged in their next VAT return.
However, if they are individuals (Business-To-Consumer, or B2C), they are less likely to be VAT registered themselves, so if you added VAT to your invoices, they would essentially experience a 20% (2019/20 tax year) increase in your prices. This might mean that you become less competitive, which could impact your business.
Some businesses even choose to shrink, or intentionally stay below the VAT threshold so they don’t experience this issue. However, you may be surprised here. As noted above, an advantage of being VAT registered is your business may appear bigger than it actually is. You might then win work with bigger customers than you have in the past.
MTD (Making Tax Digital)
From April 2019 onwards, VAT registered businesses need to use compliant software, or bridging software from Excel to be able to submit their VAT returns to HMRC. Please see our earlier Blog for more information about this.
Whilst they are not without cost, they can also be of great benefit to your business. Having more regular financial information available can improve your decision-making, bank feeds can automate a lot of the admin time and invoicing through it not only looks more professional but managing debtors is easier to, to name but a few. We can help you here with what software to choose, implementation, training and on-going support, so don’t worry, you’re not alone.
Still not sure if you should register for VAT?
Simple; contact us today. There are lots of different types of VAT schemes, such as monthly, quarterly or annual, cash or accruals, flat rate versus full scheme so we recommend you talk this through with a Professional today. Don’t leave it too late however and find out the hard way through interest and penalty payments.
We offer a free initial consultation for new clients, to enable us to talk more with you, your business and what you are trying to achieve, to enable us to help you, as your Business Partner, to realise your dreams. VAT is often one of the key discussion points as part of this.
We believe the customer comes first, we will work with you, however you want to work and that often evolves over time. For example, to begin with you may want to do your bookkeeping yourself, with us just available on demand if and when you have problems. But as things evolve, you may be too busy to do it yourself and need us to step in to enable you to focus more on your business. However, as your business gets bigger, you may then wish to bring this back in-house; even here though we are still available to support you, if and when you need us.
If you are considering being VAT registered, or need to become VAT registered and don’t know where to start, please contact Black and White Chartered Certified Accountants today, or call us on 0800 140 4644.
* Please note the allowances and rates used here, are effective for the tax year 2019/2020. To check if these are up to date, please check our allowances and rates resource pages.
