Businesses are either busy preparing or stressing about their VAT. But dealing with your VAT needn’t be stressful. It should be a relatively simple process, and one if managed properly shouldn’t cause you stress or cost your business money.
As individuals, consumers and as business professionals we encounter VAT in all aspects of our daily lives. But unfortunately, the three-letter word strikes fear into business owners and receives a reputation for being difficult to understand and manage. You may think of it with resentment, as something extra that needs to be paid or charged, but VAT can be a positive benefit for small businesses.
VAT is a tax levied on registered businesses that sell and buy goods and services. The current VAT rate is 20%. The business owner charges VAT to customers and pays the VAT to the government which is administered and collected by HM Revenue & Customs (HMRC).
The VAT process enables businesses to recover the VAT charged by suppliers for all manner of supplies purchased by your business. This includes but isn’t limited to office equipment, rental and service charges to agency costs, advertising spend, contractors and advisory fees. To claim the sum of VAT back your business needs to be registered.
The current threshold for registration is £85,000 (as at 11/05/2018). If your business has an annual turnover more than this amount you must register your business for VAT. HMRC operates a rolling 12-month period for the purposes of VAT assessments. This means that irrespective of your accounting reference date or any equivalent reporting duties, if you go over the threshold you must register for VAT. Once registered you then start charging VAT on your products or services.
Once your business is VAT registered you need to do the following:
To help understand how VAT works imagine you are a small business that is registered for VAT. You purchase goods or services from a supplier or manufacturer that is also VAT registered. They would charge you VAT on your invoice and you would pay the total invoice amount. Now let’s say that you sell this product onto your own customers, you too would include VAT on the sale of the goods. When you come to complete your VAT return you deduct the cost of the VAT on the goods purchased from the cost of VAT on the goods sold. This is the amount that you would need to pay to HMRC.
E.g You buy mailing bags from a supplier who is VAT registered. The bags cost £10 plus 20% VAT, total goods purchased by your business equals £12. You then sell the bags to your own customers for £20 plus VAT which totals £24. You would deduct the cost of the VAT from the bags purchased from the cost of VAT on bags sold (£4-£2), meaning you would owe HMRC £2 for that sale.
The above is obviously a simple example, but it helps to understand how VAT works. You would work out the total of VAT purchased and deduct that from the total of VAT on goods sold and submit this on your return.
There are other cases that may require you to register for VAT, here are some examples:
Immediately after registration you need to charge VAT to all customers, even those who aren’t VAT registered. Effectively your customers will be charged 20% on the sale of goods, products & services. This means that your customers are now being charged 20% more for the same products. However, if you feel this would put off customers you could opt to take the hit on this and swallow the extra 20% within your margins which will keep your business legitimate but won’t cost your customers anymore. The choice is yours to make, but regardless the VAT must be charged.
If your business suddenly drops below the threshold for whatever reason you have the option to deregister. However, note that upon deregistration you will need to pay back any VAT on stock, supplies and other goods purchased you are currently holding that it is unsold. This does make unregistering for VAT an unattractive option for some businesses, especially in the short term if you hope to see your business grow again. As with all accountancy related issues we strongly suggest that you seek advise from an accountant before acting.
Like most things once you get an understanding of what you need to do and how you need to calculate it, the stress will be removed. However, if you are still unsure, have questions or would prefer a professional to do your VAT for you then speak to us at Boffix. We have a team of experts ready to take the stress away, at an affordable cost to your business. We will do the calculations and submissions on your behalf leaving you to focus your time and energy elsewhere.