As your business grows there will come a time when you will need to register for VAT. In 2016-17 if your turnover reaches the threshold of £83,000 within a 12 month rolling period you have 30 days in which to register for VAT to avoid a penalty.
Many businesses keep their turnover below the threshold because they do not want to become involved with the quarterly deadlines and keeping their accounts up to date. But if you are a growing business it can be an advantage to be VAT registered. VAT registration shows the outside world that you are a business of some substance and you will also be able to claim back VAT on your purchases. It will not matter to other businesses if you are VAT registered as they will be able to claim back the VAT but domestic customers and small businesses who are not VAT registered may prefer to use a business which doesn’t charge them 20% more for their goods or services. However as a growing business you will have built a reputation for the services you offer or goods you provide.
Is your business ready to become VAT registered? Are you concerned about what is involved?
If you keep your accounts up together on a regular basis to keep track of how your business is doing being VAT registered will not be a problem. Every quarter you will have to submit a VAT return online to HMRC showing the VAT you have charged on your sales and the VAT you are claiming back on your purchases as well as the net value of your sales and purchases. You will have to pay the difference between your sales VAT and your purchase VAT to HMRC. If you are lucky enough to have more purchases than sales you will receive a refund from HMRC.
Whilst paying HMRC may seem painful, the 20% you have collected is on top of the price you would have charged if you weren’t VAT registered. And if you pay VAT on your purchases you will be able to reduce that 20% VAT you have collected and the costs in your trading account will be 20% less than they were before you were VAT registered.
As the business owner you are responsible for knowing which of your sales must have VAT charged on them. For example if you sell food you should know which types of food have VAT on and which don’t. If you sell an asset you should know that it must have VAT charged and if you invoice for commission this must also have VAT added.
When claiming back VAT on your purchases you need to know which purchases have VAT on and, even if they do have VAT, when you can claim it. Postage, for example, is exempt from VAT, but if you send an item by special delivery to be received by 9am it will have VAT on the service which you can claim. Insurance has a tax on it but it is not VAT so cannot be claimed. Receipts may show a VAT number but the item/s purchased may not have VAT.
The documentation to support the VAT return must be retained in case HMRC want to review it. It can be retained on paper or electronically but must be easily accessible in the event of a VAT inspection.
Being VAT registered is a little more work but the quarterly deadline ensures you keep your accounts up to date. And if the thought of becoming VAT registered is just too daunting a bookkeeper will sort it all out for you. So don’t hold your business back by avoiding VAT registration. Embrace it and see your business grow!