How Does VAT Work for Small Businesses?

So, you decided to start a business, or you’re helping someone who’s building their dream business. Great!

But when it comes to VAT and filing, you might need to call on some expertise. 

You already have so many moving parts to keep track of, after all. Filing VAT returns manually or even via software is therefore always going to be a bit of a headache.

The first step is to understand how VAT might work for your small business.

Becoming MTD compliant

In April 2019, HMRC began transitioning all VAT declarations to the digital realm, through the Making Tax Digital (or ‘MTD’) initiative. This is great news because there are numerous software options out there that can handle MTD for you.

The push for digitisation of all those receipts, invoices, offers, and every other piece of paper featuring a bunch of numbers is great, and it’s important to get an early start on it. 

A great tool for this is the XERO accounting software system. The customisation options available in Xero help to file your VAT return either monthly or quarterly (which is the preferred method).

Accounting items to consider

There are two accounting elements to take into consideration when working on the VAT for your small business.

  • Flat VAT Rate. This option was introduced in 2002 to provide smaller businesses with a simpler way of calculating their VAT. It is not there for you to pay less VAT. Instead of adding up all the VAT charged minus the VAT you want to reclaim (on expenses), you only pay a percentage of sales to HMRC as your VAT charge. This is based on your business, and… voila! No double calculation needed. 
  • Cash Accounting vs. Invoice Accounting. This only matters if you have horribly slow-paying customers. If that’s the case, you should choose cash accounting. This means you only pay VAT when you’ve received funds from the customer. Invoice accounting means you pay the VAT on the invoice and wait for the client to pay their fee, plus VAT.

It’s worth noting that invoice accounting can often lead to cash flow problems; something smaller businesses really could do without.

Should I become VAT registered? 

If your turnover is over £90,000 per year (for 2024/25), then you must be VAT registered. 

It’s not a bad idea psychologically, too – particularly if you have big ambitions and want to grow the business; the VAT ‘label’ can add stature to the operation. 

Equally, if you’re going to have a lot of expenses (especially during your first year) then being VAT registered will help you reclaim a portion of those costs. 

Can I do this by myself?

It’s certainly possible to undertake the VAT yourself, but you do not need to. Record keeping can be a daunting task, and it’s always great to have an expert on hand to support your transition to a digital format.  

So, why not hold onto your records and let Trinity Accounting handle your tax strategy? All the points discussed above represent only a fraction of our knowledge and experience; our team can provide you with not only the best advice but the best accounting outcome for VAT and all tax-related issues. 

Get in touch with us today to find out more.

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Send us a few details and one of our team will be in touch to see how we can save you tax