This is a question we are often asked by our clients. Value Added Tax (VAT) is a tax that is charged on goods and services. If you are VAT registered you have to add VAT at the correct rate (usually 20%) to the goods or services you sell/provide. This additional income isn’t yours; you are collecting it on behalf of HM Revenue & Customs (HMRC).
Not as easy as it sounds
This may sound simple but VAT is actually a complex and difficult tax to understand and get right – which is why many businesses inadvertently overpay or underpay VAT.
Why is it so complex? Well, firstly there are different rates of VAT, depending on the type of goods or services your business provides. At the moment there are three different rates. They are standard rate, reduced rate and zero rate. In addition to that, there are also some goods and services that are exempt (no VAT is charged on them) and outside the scope of the UK VAT system altogether.
What does a VAT registered business have to do?
Generally, every three months a VAT registered business submits an online VAT return to HMRC and, if the amount of VAT they charge exceeds the amount they spent on purchases, they will need to hand over the difference to HMRC. Sometimes, however a business may be due a refund if they spent more on VAT than they collected. So there can be a financial gain from being VAT registered.
The main negative of being VAT registered is product prices – it will increase the costs of your products. For businesses selling to other businesses that are VAT registered this isn’t a problem. However, if you are selling to the general public it could mean your prices are higher than your competitors.
So, who has to be VAT registered?
Well, if your business supplies goods or services that are classified as ‘taxable supplies’ and your turnover for the previous 12 months was above a certain level (called the VAT threshold, which is currently £81,000), you will have to charge VAT. Additionally, if you think your turnover will soon hit the VAT threshold you will also need to register.
The pros and cons of registering for VAT when you aren’t required to are really something you should discuss with an accountant. They will be able to look at the products/services you provide and analyse whether or not you should voluntarily register for VAT. They will also be able to suggest whether or not the VAT flat rate scheme, or cash accounting scheme, would be best for your business.
Want to learn more?
If you’d like to learn more about VAT and how it affects your business please get in touch by calling 01277 823688, or email firstname.lastname@example.org. Should you need to, or decide you want to voluntarily register for VAT, we’ll discuss what needs to be done and what services we provide (we can help with VAT registration, monthly bookkeeping and preparation and submission of VAT returns). Or, if you’d prefer to do it on your own we can provide the tools and software needed to help you accurately prepare and submit your returns.
Nine Ashes Bookkeeping is an independent accounting and bookkeeping firm based near Ongar, Essex. We specialise in providing accounting and bookkeeping services to small businesses. Our team consists of a Chartered Accountant and a qualified bookkeeper with over 10 years experience in the business. We are a friendly, professional firm and enjoy helping our clients succeed and grow.