For most of us, VAT is the acronym we’ve come to expect on the bottom of our bills and receipts.
We know when paying for goods and services it’s simply the 20% applicable rate for tax.
Once we’re on the other side of the looking glass however, either starting a new business or taking control of a small one, VAT takes on a whole new form of importance and understanding.
Small and new business owners find themselves asking whether VAT will even be relevant for their small businesses, whether VAT is applicable for every business, and even whether there are pros and cons of being VAT registered.
In this blog, we’ll give you a quick summary of what VAT is, and when, or even whether, your business will need to register for VAT.
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What is VAT?
When we talk about VAT we’re referring to Value Added Tax. This is simply a consumption tax that is placed on either a product or service at each stage of its supply chain.
Currently in the United Kingdom the standard rate of VAT, or Value Added Tax, is 20%. This is the amount of tax a customer pays on the total cost of the product.
There are exceptions to this rule. Currently children’s clothing and footwear benefit from a zero rate for VAT. This is because in VAT law, there is no concrete definition for “young children” as the age range is deemed too broad to narrow down. Thus, the VAT relief is based upon the average maximum size a child would be on their 14th birthday.
It’s a common assumption therefore that every business must be VAT registered, especially small and new businesses, but this is not always the case.
When should a new business register for VAT?
In the United Kingdom, all businesses need only to register for VAT if their annual taxable turnover is expected to exceed the VAT threshold in the next 30 days, or has exceeded the VAT threshold in the past 12 months.
Currently the VAT threshold is £85,000 and this figure will remain unchanged until the 1st of April 2022 at the earliest.
As the government sets and reviews the figure, any changes to the threshold will be announced in the Chancellor’s budget statements.
In the case of brand new businesses, provided the company was not going to turnover £85,000 in either its first 30 days or 12 months of starting up, there would be no need to register for VAT.
For small businesses, the same rule of thumb would apply. If the business had not yet exceeded the £85,000 threshold in 12 months and did not look likely to exceed the threshold within the next 30 days, the business could safely hold off on registration.
However, if a new business was expected to exceed the threshold within its first 30 days or 12 months, the business should register for tax immediately alongside its other startup documentation.
Read More: Setting Up a Limited Company
Likewise if a small business had not exceeded the VAT threshold within 12 months, but looked set to exceed it in the next 30 days, the business must register for VAT.
It should be noted that established business owners should not fear receiving a HMRC audit at any point of their registration. There are no repercussions for registering midway through a tax year, or even registering two to three years after a business begins.
Can you register for VAT below the threshold?
Yes, you can voluntarily register for VAT if your annual turnover is below the threshold.
Whilst it is not a necessity, it can come with pros and cons.
Here are some of the benefits of registering for VAT below the threshold:
- In the beginning, HMRC will identify your business as being below the threshold on your annual tax returns. Therefore, no VAT will be charged on your goods or services until your business exceeds the threshold when they will apply the VAT automatically.
- Being VAT registered adds an air of authority, permanence and trustworthiness to your business. This is especially important in the case of new businesses who often need these attributes to assure customers.
- If your business will be servicing customers who are also VAT registered, the VAT they will incur when paying you for your business’ goods or services is reclaimable. This means potential customers won’t be put off by having to pay VAT, as they’ll simply be able to get this back from HMRC.
- Registering for VAT shields your businesses annual turnover from prying eyes. Whilst this isn’t of huge importance, businesses who aren’t VAT registered are effectively telling customers and competitors that they turnover less than the VAT threshold. For new businesses, announcing a low threshold can come with downsides including prospective clients trying to negotiate cheaper deals based on connotations of inexperience.
- VAT incurred in start-up costs can be recovered by registering prematurely. For example, a start-up car mechanic may spend large amounts of money purchasing a garage and equipment. The VAT elements incurred in those initial costs are then able to be reclaimed and returned to the business much sooner than if the mechanic was to wait until the turnover exceeded the £85,000 threshold.
Of course these benefits do come with minor drawbacks. Downsides to voluntarily registering early for VAT are:
- Extra administrative work. You will need to send regular VAT returns to HMRC four times a year, and ensure you abide by VAT record keeping rules and requirements which can be complex. Whilst HMRC will be lenient if small or new businesses make mistakes on these rules the first time around, repeated mistakes will leave businesses liable to penalties so it’s best to work alongside a small business accountant.
- The amount you charge to your customers has to be increased to account for VAT on taxable income. This increase must be added regardless of the type of customer, so your goods and services can appear more expensive. For new or small businesses entering competitive markets these prices could appear less appealing to non-registered customers, or those unable to reclaim VAT.
- You may have to pay a VAT bill. Initially, if your business’s output VAT is higher than the input VAT – as is most often the case for new or small businesses – then the difference must be paid to HMRC. If cash flow is tight for new businesses, or if small businesses do not have the excess income to, at 20% these bills can cause significant problems.
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Do I need to register for VAT as a sole trader?
Yes, if your annual turnover exceeds the £85,000 threshold. Sole traders or partnerships are not exempt from VAT registration as they are still seen as businesses in the eyes of HMRC.
As with new or small limited companies, if your annual turnover falls below the VAT threshold there is no need to register but it can still be done voluntarily.
See More: The Advantages of Becoming a Sole Trader
How do I register for VAT online?
Businesses can register online for VAT at Gov.uk’s VAT registration page.
Whether you are registering out of necessity or voluntarily, the same process applies as it does for limited companies, sole traders or partnerships.
What do I need to do now I’m VAT registered?
Once VAT registered, businesses must do three things.
1. Comply with HMRC’s record keeping requirements:
Businesses must keep records of:
- Copies of issued invoices
- Copies of received invoices
- Agreements regarding self-billing
- The contact details and VAT numbers of self-billing suppliers (if applicable)
- Credit or debit notes
- Export and import records
- Records of items VAT is unable to be reclaimed on
- Records of goods either given away or taken from stock for private company use
- Records of all zero-rated, reduced or VAT exempt products bought or sold by the business
- Separate records of VAT charged and VAT paid on purchases.
- Other general business records like bank statements and receipts
In April 2019 the government initiated Making Tax Digital. In accordance with this legislation businesses must abide by the same record keeping requirements as listed above, as well as additionally keeping digital records of the following:
- The business name, address and VAT registration number
- Records of any VAT accounting schemes used by the business
- Records of the Time of Supply and Value of Supply (excluding VAT) on everything purchased and sold for the business
- Records of the VAT on everything the business purchases and sells
Records must be kept for a minimum of six years, and if the business uses the VAT MOSS service, records must be kept for 10 years.
2. Issue VAT invoices
There are three types of VAT invoice, all with different requirements that must be issued as part of the invoice. They are:
| Invoice Details | Full Invoice | Simplified Invoice | Modified Invoice |
| A Unique invoice number (That follows on from the last invoice) | Yes | Yes | Yes |
| The Businesses name and address | Yes | Yes | Yes |
| The Businesses VAT Number | Yes | Yes | Yes |
| The Date | Yes | No | Yes |
| The Tax Point | Yes | Yes | Yes |
| Customers name or trading name, and address | Yes | No | Yes |
| Description of goods and services | Yes | Yes | Yes |
| Total Amount excluding VAT | Yes | No | Yes |
| Total Amount of VAT | Yes | No | Yes |
| Price Per Item excluding VAT | Yes | No | Yes |
| Quantity of each type of item | Yes | No | Yes |
| Rate of any discount per item | Yes | No | Yes |
| Rate of VAT charged per item (If items are exempt or zero-rated no VAT is indicated on these items) | Yes | Yes* | Yes |
| Total Amount including VAT | No | Yes* | Yes |
*If any items are charged at differing VAT rates, the different rates must be indicated on each item.
3. Submit your VAT return
Finally, VAT returns must be submitted online every quarter, even if there is no VAT to either pay or reclaim.
The deadline for submitting your VAT return and making a payment is a month and seven days exactly after the close of a VAT period.
For example: If a VAT period ends on the 31st of March 2021, the submission due date will fall on the 7th of May in the same year.
If this deadline is not met, your business will incur penalties from HMRC.
As a final reminder due to the launch of Making Tax Digital, businesses will also now need to use MTD functional compatible software in order to file their VAT returns.
At iFinance Department we are experienced with helping new and small businesses with their VAT requirements. Our team uses the functional software required to file VAT returns, and we can assist with the creation of invoices and the correct record keeping. If you’re feeling swamped with VAT, give us a call today and let us take the burden.