Understanding VAT For Small Businesses
When starting out as a sole trader or small business it’s crucial to get up to grips with VAT as quickly as possible. In the past VAT will have simply been included in the cost of a product that has been purchased, with no extra thought required. However, now it’s time to pay more closely to VAT and what it means for your business.
Here, we explain what VAT actually is, how it works and whether it is relevant to your business or not – as not all businesses need to register for VAT.
So, what actually is VAT?
If you aren’t already aware, VAT is an abbreviation of Value Added Tax and it’s essentially a government tax that has been levied on the majority of goods and services, except for some exemptions such as essential goods. In the UK VAT is typically included in the display price of a product, but for businesses, it’s technically the price difference between what you have paid and what your charge for a product. If you are VAT registered – the idea is that the VAT you pay on products or services as a business equals out the VAT your charge. If it doesn’t you can claim back on your VAT return.
VAT is typically charged in a variety of ways, however, smaller businesses often opt to use the flat rate. The standard rate of VAT is 20% but it can range depending on the products or services being sold. In 2017 the government made some changes to the flat rate – full details of the rate percentage by sector can be found here on the gov.uk website.
To work out how much VAT you add to your product – you multiply the cost of the product or service by the required percentage rate then add the result to the original price.
Do you need to register for VAT?
The threshold before you are required to register for VAT in 2018 is £85,000 per year (12-month period) – if you earn below this then you aren’t required to register. However, in some cases, it may still be beneficial to register, especially if your business spends more on physical items that charge VAT than you sell (as your input will be therefore much higher than your output, and HMRC will make up the lost balance lost).
It’s also worth noting that if at the start of any month (30-day period) you expect your turnover to exceed the threshold – you should register straight away. Remember, you can’t claim VAT back on any product or service your business has purchased if you aren’t VAT registered beforehand.
How to register
We have expert advice for registering for VAT and it’s relatively straightforward. Alternatively, you can find full information on how to register for VAT and performing the VAT1 form on the gov.uk website. If you’re still unsure, get in touch with a VAT accountant today.
How to pay VAT to HMRC
It’s common for a business to complete a VAT return quarterly. There are a variety of different VAT schemes available, so it’s always worth checking these first. Keeping a record of all your businesses purchases and sales is crucial as it will determine any return from HMRC if you are due one. The VAT return will show your net output and input tax and can be done online.
When you think of tax you often think of how it’s going to cost you money, however being registered for VAT can actually save you money. For more information of on VAT, talk to a VAT accountant today.
