As a businessperson, you cannot avoid the issues surrounding VAT (Value Added Tax), and whether your business should register to collect it.
As the name suggests, it is a tax on the value that you add by making or selling your goods or services. Thus you act as a collector for the Government of the tax due from your customers: and you claim back the tax on any supplies that you purchase from VAT-registered suppliers.
The standard rate applies to most items and is currently 20%. There are some items that qualify for a reduced 5% rate (e.g. domestic power supplies, sanitary hygiene items) and others that are zero-rated (e.g. bus, train and plane fares, books and childrens’ clothing).
How it Works
You will almost certainly be required to make a quarterly VAT Return – it has to be made by the 7th of the second month following the quarter in question. You record your sales, and the VAT you billed on them, known to HMRC as Output Tax; and your purchases or qualifying costs and the VAT you paid on them, or Input Tax.
The return subtracts the Input Tax from the Output Tax. If the result is a positive figure, you owe that amount. If it is negative, you claim back that sum from HMRC.
These days the return must be made online and you likewise pay online. You will need to apply to obtain a Government Gateway ID and password, which will arrive by post, to register.
Should I register?
Assuming that your trade is in ‘taxable supplies’ then you are obliged to register if either one of these conditions applies:
- Taxable sales in the last 12 months have exceeded the VAT threshold level. At the time of writing, this is £90,000 p.a., effective from April 2024; or –
- Annualised taxable sales are anticipated to exceed this level within the forthcoming 30-day period.
Companies in certain sectors will be exempted from applying VAT and these may include –
- Healthcare
- Insurance
- Education
- Finance
If this means that there is a total exemption on all the firm’s sales then no registration is possible. However if a proportion of your sales is subject to VAT then the threshold conditions do apply.
Making a Voluntary Registration
There is no prohibition on your business choosing voluntarily to register for VAT despite being smaller than the mandatory threshold. Assuming that most of your turnover is potentially subject to VAT and you sell to VAT-registered customers, then there is a strong motivation for you to register. This then allows you to claim back VAT on your business-related purchases, which you cannot otherwise do. This includes many legitimate overheads, such as professional fees and running costs.
The only drawback is if an important part of your trade is with organisations that are unable to claim back VAT. With those customers you would be putting yourself at a 20% competitive disadvantage against those competitors who choose not to register.
In most cases the net effect for the firm that registers will be positive. And because you are acting as a Government tax collector every quarter before you pay the money over to HMRC, there is a temporary cashflow benefit – so long as you ensure that you are able to pay the likely bill when due.
Is it Complex?
Making the return does involve administrative work but you should build the recording process into your accounting routine to minimise the burden.
Normally it is assumed that you record your invoices for VAT Return purposes: but you can opt for one of two special schemes that can save cash and time for small businesses:
- Cash Accounting Scheme
Under this Scheme you pay VAT only when the customer pays you, thus you are not out of pocket from paying tax before you receive the actual cash yourself.
- Flat Rate Scheme
Specifically aimed at small businesses to lessen their burden, it allows you to pay VAT based on a determined % of sales. The VAT rate will be lower, but in consequence you cannot claim back VAT on expenses. If you have a significant proportion of non-VAT suppliers then this may suit you well.
Seeking Help
Many firms choose to outsource their VAT administration. We at Odiri Tax Consultants have extensive experience in this field. Depending on your circumstances we can advise you on whether to opt for one of the special schemes that are on offer.
It is a simple matter for you to opt for ‘agents online’ within your VAT registration at gov.com, and record us as your authorised agent to act for you. You will receive an Authorisation Code and then pass this on to us for action.
If you would like to discuss your VAT options, or for any small business book-keeping issues, please contact Loveth Watson at Odiri Tax Consultants.
