Tax planning for small businesses and entrepreneurs can be difficult to keep up with. This article aims to provide you with the necessary information to guide you through the process, with top tips regarding how to handle VAT advised by Rob McCann, Director at The VAT People.
What is VAT?
Value Added Tax (VAT) is a common item on most bills and receipts. Is applied to the price of certain goods, services and other taxable supplies that are bought and sold within the UK. Although British rules now differ from the system of VAT that operates within the European Union, they are consistent with it.
Since January 2011, the VAT rate has been 20% for almost all goods and services, with a few exceptions to this such as children’s clothing and footwear.
Should I register for VAT?
If your business is turning over more than £85,000 per year from ‘taxable’ income streams, you will need to register for VAT. If your small business is earning less than this, you do not need to register.
How VAT works
You can only charge VAT once your business is registered for VAT.
VAT is charged on many supplies, including:
- Hiring or leasing goods to a person/business
- Commission
- Items sold to staff
- Business sales e.g. selling goods and services
- Business goods for personal use
- Non-sales like bartering, part exchange and gifts
- Selling business assets
These are what is known as “taxable supplies”.
VAT-registered businesses must:
- Charge VAT on their goods and services
- Reclaim any VAT they’ve paid on business-related goods and services
- Account for import VAT on their VAT return if they use import VAT in this way
As a VAT-registered business/entrepreneur, it is integral that you report to HM Revenue and Customs (HMRC) the amount of VAT you have charged and the amount of VAT you have paid. Usually, this is done through a VAT return, which is due every three months.
VAT Top Tips
Getting to grips with VAT as a small business or entrepreneur can be difficult. Take a look at some top tips below:
- Once you have registered for VAT, you must include VAT on the costs of any goods or services your business provides. This will impact the pricing your business offers, and will also impact any non-VAT registered customers you have, as they will not be able to claim the cost of VAT themselves.
- Bookkeeping is vital to good VAT practice. You must maintain regularly updated, accurate VAT records so that you can complete your VAT returns efficiently and with ease. Make sure that you keep all records (receipts, invoices, etc.) in a central place for ease of access.
- The most common mistake that small businesses and entrepreneurs make when considering whether to register for VAT is to assume that ‘turnover’ calculations refer to the current accounting year. This is incorrect, as ‘turnover’ should include the 12 months leading up to the current date.
- You may be able to claim VAT back for goods bought or imported for your business for up to four years before the business was registered for VAT. You can do so if the goods are:
-
- VATable for business purposes
- Still held by you, or they have been used to make goods you still hold (with proof of purchase)
- Bought by you as a small business that is now registered for VAT
- Because of the complexities of VAT and the effort it can sometimes take to handle the processes for VAT, some small business owners are tempted to avoid registering for VAT and split their business into separate parts; this is so the business appears not to meet the VAT threshold. HM Revenue & Customs (HMRC) will act against this and has published anti-avoidance measures showing how they go about this. Do not be tempted to try and split up your business to avoid VAT accounting and admin.
- If you are ever unsure about how to handle your VAT requirements as a small business or entrepreneur, you should seek advice from an expert adviser, HMRC or a VAT consultancy in order to stay on the right track and avoid any consequences of getting it wrong.
