VAT (Value Added Tax) was introduced to the UK economy in 1973 and is unsurprisingly the third largest source of money to the UK government. The tax, added to the purchase of goods, is currently set at 20% on top of the value of the item or service that is sold.
Most of the things you buy have VAT added and you’re probably aware of this on the restaurant bill or your coffee chain receipt. VAT helps the UK to maintain its strong position in the global markets and many businesses have become a VAT collector to help the UK Government to do this.
But do you have to charge VAT? And what are the benefits of doing so?
When do you have to charge VAT?
Firstly, it’s only a choice to become VAT registered if you’re below the VAT threshold. You must register your business for VAT with HMRC if its VAT taxable turnover is more than £85,000.
If your taxable turnover is below that, you do have a choice to register for VAT if you want to. There are some who do, and some who chose to wait.
The obvious change is that your prices will become 20% more expensive than they were before. You either swallow the increase or become 20% more costly than your competition (if you’ve benchmarked your price on them). That’s not to say that charging VAT is a bad thing and if you’re a B2B business selling to other VAT registered businesses they’ll be able to claim VAT back anyway.
It’s also a good thing to put in place if you’re planning on growing. A successful business is likely to go over the threshold and switching to a VAT registered business involves paperwork, time and costs.
There are different types of VAT schemes
Due to the complex way businesses are structured, HMRC created different schemes to reduce the burden on businesses and in some cases this can be good for your business and its profits.
VAT Annual Accounting Scheme
The annual accounting scheme aims to lessen the admin in your business with just one VAT return a year. Although you’ll need to make monthly payments to HMRC, based on your previous annual VAT Return, some businesses opt for this to ease their admin. This scheme is likely to become a thing of the past as Making Tax Digital (MTD) comes into play as HMRC are moving towards quarterly and even monthly VAT submission.
VAT Cash Accounting
Great for cash flow, cash accounting means that you only pay the VAT on the invoices received so you only pay the VAT you’ve been paid by your clients or customers. This is great for a company’s cash flow and also good for your business if you have bad debtors or clients who pay late and cause you enough trouble already!
VAT Flat Rate Scheme
This scheme effectively helps your business to earn money for collecting VAT with the percentage rates that you pay to HMRC being smaller than the percentage you’re charging. These are determined according to the trade sector of your business and range from 4% to 16.5% and are also affected by your turnover too.
Some businesses are better off on this scheme as they can earn a little extra for collecting the VAT but it’s always worth speaking to your accountant to see which scheme suits you the best.
Making Tax Digital and VAT registered businesses
If you’re currently a VAT registered business then you’ll need to be submitting your VAT digitally too to bring it inline with the new HMRC movement towards submitting all tax online. If you’re using an online system like Xero then you’re mostly likely doing this already but it’s worth noting that a VAT registered business will no longer be able to submit their records directly through the HMRC portal from April this year. You must, instead use a third party, MTD compliant software. This is to help eliminate data entry errors caused by copy figures from one system to another.
Should you become VAT registered?
If you’re looking to grow your business then and you do it well then it’s likely that the choice will be taken away from you. But it’s not a bad thing and in many respects shows that you’re a serious business.
Many of the companies that you buy from right now are charging VAT and you’ll be no doubt paying this without any regard. Charging VAT on your services can have a really good selling point and shows you to be an upstanding company to your clients or customers and depending on the scheme you apply for or choose, it could even earn you some extra revenue.
You can also claim back the VAT on many of your purchases too making it a cost-saving to your business.
As with all tax and accounting decisions, it can be complicated and all comes down to your individual circumstances and plans for the future.
Speak to us or your accountant first so that you make the right decision for your business and don’t pay too much or miss out on the many advantages that there are in the tax system.