VAT for business: everything you need to know

Posted 11th October 2018

In Accounting Tips, Making Tax Digital, Small Business, Start Ups, VAT

Your business may not have reached the threshold for VAT (Value Added Tax) on goods and services just yet.

However, could your business benefit from registering for VAT early? If so, what’s the best VAT scheme for your business? VAT is a lot more complicated than just slapping the default rate of 20% onto goods and services.

It’s important for businesses to understand both the risks and opportunities surrounding VAT to effectively manage this tax. In this blog, our accounting firm takes you through everything you need to know about VAT for business.

What is the VAT threshold for UK businesses?

The VAT registration threshold in the UK currently stands at £85,000. If your company’s annual turnover exceeds this threshold, you must register for VAT.

The VAT threshold changes. In 2016, it was £83,000, before increasing to £85,000 in April 2017. Failing to register for VAT can result in a fine from HMRC and the payment of the VAT paid if you registered within 30 days of reaching the threshold.

For example, a business whose turnover exceeds the threshold on 30 September 2018 will need to register for VAT on 1 November 2018.

What VAT rate should I pay?

The standard rate for VAT is 20% for most goods and services.

There is a reduced VAT rate of 5% on goods and services such as:

Children’s car seats
Energy and Power
mobility aids for older people, provided they’re for someone over 60 and the aids are installed in their home

The zero VAT rate still means you need to charge your customers VAT, but this is at 0%. You’re still required to keep VAT records and complete a VAT return.

The zero rate for VAT is charged on goods and services such as:

most food
books and newspapers
children’s clothes and shoes
motorcycle helmets
most goods you export to non-EU countries
goods you supply to a VAT-registered EU business – you can check if the VAT number is valid

Choosing a VAT scheme

The usual method for businesses is to keep up-to-date records of all purchases and sales. This can easily be done using accounting software to capture VAT data automatically. With HMRC’s (Her Majesty’s Revenue & Customs) making Tax Digital annual accounting come into force, this method of record-keeping will become the preferred option for businesses – rather than keeping paper records.

These records are then used to file a VAT return. There’s a possibility that you’ll get money back if you’ve had more purchases than sales.

There are other VAT schemes available to businesses:

Annual accounting VAT scheme

The annual accounting VAT scheme is similar to the usual method. However, you’re only required to complete one annual VAT return.

You are only eligible for the scheme if your estimated taxable turnover is less than £1.35m. You can then stay in the scheme if it remains below £1.6m.

Flat rate VAT scheme

Smaller businesses with annual turnovers of up to £150,000 can join this VAT scheme, whereby you simply pay a percentage of your total turnover as VAT.

The amount you pay depends on the type of business you run, with different industries having different rates. You’ll still have to charge VAT on your invoices, but you don’t have to account for the VAT details of every purchase too. You can continue to use this scheme, providing your total business income doesn’t exceed £230,000.

If you use this scheme in your first year of registering for VAT, you can receive a 1% discount.

Cash accounting VAT scheme

With this VAT scheme, you account for VAT on the date you’re paid rather than when you send the invoice. This means you have to keep records of the actual payment date.

This is especially helpful if you have slow payers or if your business is a design agency with clients on monthly payments but annual invoices.

However, this scheme isn’t a good choice for businesses that buy many items on credit and sell without giving any. You can’t reclaim the VAT until your items are fully paid. As with the standard VAT accounting method, you must still complete your quarterly returns.

This scheme is an option for businesses with an annual turnover under £1.35m.

Retail & VAT margin schemes

VAT retail schemes can make calculating your VAT simpler. Instead of calculating the VAT for each sale you make, you do it once with each VAT return.

It’s particularly popular with businesses that deal in second-hand goods, such as antique and art dealers.

There are separate retail schemes depending on your turnover—one if your retail turnover (excluding VAT) is below £1m and another if your turnover is between £1m and £130m. If your turnover exceeds £130m, the retailer must arrange a bespoke retail scheme with HMRC.

Smaller retailers may be able to use this scheme with either the cash or annual accounting schemes.

You cannot combine a retail scheme with the flat rate VAT scheme, but retailers can choose to use the flat rate scheme alone.

Voluntary VAT registration: registering for VAT before you reach the threshold

If your business’s turnover does not exceed the current VAT registration threshold, you can still register for VAT voluntarily.

There are some benefits to doing so:

The VAT you pay (input tax), for example, on software and equipment, could be more than the VAT you collect from your customers – the ‘output tax’. If your input tax exceeds the output tax, you can collect the difference back from HMRC, saving you some money.
If you’re not registered for VAT, other companies will know that you’re a micro business. Registering for VAT early sets a precedent that you want to grow your business and may give the impression that your business is bigger than it actually is. It’s almost like a business badge of honour. It can excel in client or customer confidence and boost your company profile.
If the vast majority of your clients are other VAT-registered businesses who can claim back VAT, they won’t be affected by your business being VAT-registered.

However, registering for VAT does have some disadvantages:

If your output tax (what you collect from your customers) is more than your input tax (what you pay on goods and services), you will pay more to HMRC.
Your business will need to keep records of receipts and invoices. In the past, this would have been more challenging. However, accurate data can be kept easily with robust accounting software and some handy apps.

Why you wouldn’t want to register for VAT early

The most common reason is if your customers are not VAT-registered businesses. For example, you might provide services to the general public. You’ll have a decision to make on whether to pass on the cost of VAT to your customers or whether, as a business, you absorb this cost.

VAT and Making Tax Digital

All VAT-registered businesses with a turnover above the VAT threshold must keep digital records of their tax affairs from 6th April 2019 as part of HMRC’s Making Tax Digital initiative. This means that VAT returns must be created from digital records using HMRC-approved online accounting software. This might be accounting software that you’re using already, such as Xero, Quickbooks and Sage.

Once Making Tax Digital comes into force, submitting VAT returns by post or via the HMRC online service will no longer be possible.

How can I register for VAT?

You can easily register for VAT online. However, we recommend speaking with an accountant before doing so. Registering for VAT too early can have detrimental consequences if you don’t reach the threshold.

You will need to quote your VAT registration number on any receipt or invoice in which VAT is applied to goods and services.

Get the right VAT advice.

As you can see, Value Added Tax is a little more complicated than meets the eye. It’s worth seeking the advice of an accountant because, with a little thought and planning, they can arrange the best scheme that works for your business. With this in mind, you should find an accountant with experience in your industry because they’ll be familiar with how a certain scheme benefits businesses like yours.