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Value Added Tax (VAT) is one of the UK\u2019s most complex taxes. There are so many rules, regulations and schemes that getting the right advice, at the right time, from a suitably qualified VAT professional, is essential for many businesses. For now, what are the key facts that small-business owners should know about VAT?<\/p>\n
1<\/strong> All businesses must register and account for VAT if their taxable turnover in the previous 12 months exceeds the VAT threshold. That includes sole traders (ie the self-employed) and members of an ordinary partnership, not just limited companies.<\/p>\n 2<\/strong> The VAT threshold for 2019\/20 is \u00a385,000 and it will stay this way until at least 1 April 2022.<\/p>\n TOP TIP >> The most common mistake owners make when considering whether to register for VAT is to assume that \u201cturnover\u201d relates to the current accounting year, rather than the 12 months leading up to the current date.<\/em><\/span><\/p>\n 3<\/strong> The taxable turnover threshold at which businesses can apply to de-register for VAT is \u00a383,000 a year. This threshold will also remain until at least 1 April 2022.<\/p>\n 4<\/strong> You must also register for VAT if you:<\/p>\n 5<\/strong> If your business is VAT-registered, you must charge VAT on all VATable sales. The standard rate of VAT is 20%; there is a reduced rate of 5%; some goods and services may be zero-rated.<\/p>\n 6<\/strong> When VAT-registered, you can reclaim VAT paid on your business purchases.<\/p>\n 7<\/strong> When your business becomes VAT-registered, it effectively becomes an unpaid tax collector for HMRC, because you pay HMRC VAT you\u2019ve charged on goods or services you\u2019ve sold, less VAT you\u2019ve paid on things your business has bought.<\/p>\n 8<\/strong> After registration, you should tell your customers that you\u2019re now VAT-registered. You then add VAT to the price of things they buy from you, detailing this amount on the invoice or receipt you give them.<\/p>\n 9 <\/strong>Via their VAT returns, your VAT-registered customers can claim back VAT they\u2019ve paid to you, so, the net effect is nil. Ultimately, they do not<\/em> end up paying a higher price.<\/p>\n 10<\/strong> But, if your customers are not<\/em> VAT-registered, they cannot claim back VAT they\u2019ve paid to you. They must either accept this or to retain their custom you might meet them some of the way by reducing your prices\/margins.<\/p>\n 11<\/strong> Adding VAT can make your prices less competitive when selling to those who aren\u2019t VAT-registered. You should consider this when setting or agreeing a price if you become VAT-registered.<\/p>\n 12<\/strong> VAT-registered businesses must complete and file a VAT return, usually every quarter. To make sure you get your tax return in on time, keep your accounts up to date.<\/p>\n 13<\/strong> The VAT return is due seven days after the end of the month following the quarter-end date (eg 7 May for a 31 March quarter end; 7 June for 30 April quarter end, etc).<\/p>\n TOP TIP >> Because of the complexities of VAT, some business owners try to avoid registering for VAT by organising their business into separate parts, so they seemingly don\u2019t reach the VAT threshold. HMRC will act against this and has published Targeted Anti Avoidance Measures, setting out how. Don\u2019t be tempted to try to split up your business to avoid VAT accounting and admin.<\/em><\/span><\/p>\n 14<\/strong> A VAT invoice must generally show:<\/p>\n 15<\/strong> For each type of item you sell you must show the:<\/p>\n <\/a>TOP TIP >> You may be able to claim the VAT back on goods your business bought or imported for up to four years before it was registered for VAT if the goods:<\/em><\/span><\/strong><\/p>\n You can\u2019t reclaim VAT on goods that you\u2019ve completely used up before you registered for VAT (eg petrol, electricity or gas). You can\u2019t claim back the VAT for items already sold to customers. You may be able to claim back the VAT on services for up to six months before your business became VAT-registered. \u00a0<\/span><\/em><\/strong><\/p>\n 16<\/strong> There are several special schemes that you can use if you are VAT-registered, including:<\/p>\n 17<\/strong> Getting tailored expert advice can ensure that you select the right VAT scheme for your business.<\/p>\n TOP TIP >><\/strong> Although the Flat Rate Scheme used to be popular for those with limited expenses seeking to simplify their VAT admin, a change implemented from 1 April 2017 means it\u2019s become much less appealing.<\/strong><\/span><\/p>\n A limited-cost business must use a flat rate of 16.5% rather than the percentage that applies to its industry. And because it\u2019s applied to gross turnover, the effective rate of VAT paid to HMRC is 19.8%, so the benefit is just 0.2%. The net effect is most limited-cost businesses should either de-registered for VAT (if their turnover allows) or move to standard VAT accounting, meaning they account for VAT on their sales and purchases.<\/strong><\/span><\/p>\n You are a limited-cost business if the amount you spend on VATable goods including VAT is either:<\/strong><\/span><\/p>\n Note: The test applies only to goods and not services, with goods excluding things such as travel, rent, accountancy fees, insurance, etc. More on what \u201cgoods\u201d includes can be found on government website gov.uk.<\/a><\/span><\/strong><\/p>\n 18<\/strong> If you\u2019re registered for VAT with a turnover of more than \u00a385,000, you fall within the Making Tax Digital for VAT new reporting regime, which came into effect on 1 April 2019.<\/p>\n 19<\/strong> Under the new rules, you must file your VAT returns via a new HMRC digital gateway. You need not provide any additional information.<\/p>\n\n
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