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1 week ago
Starting a small business is exciting. Managing your taxes? Not so much. Whether you’re selling homemade candles or providing graphic design services, understanding VAT (Value Added Tax) is vital to keeping your business on the right side of the law.
Let’s break it down step by step.
VAT, or Value Added Tax, is taxation added to the price of most goods and services sold in the UK. It’s a consumption tax, meaning the end customer usually foots the bill.
If you’re a VAT-registered business, you collect VAT from your customers and pass it on to HMRC (His Majesty’s Revenue and Customs).
Not every business needs to register for VAT immediately. Here’s how it works:
Compulsory Registration: If your business’s taxable turnover exceeds £85,000 in 12 months, you must register for VAT. This turnover includes most goods and services you sell. There are exceptions, but they’re rare for most small businesses.
Voluntary Registration: You can still register for VAT if your turnover is below £85,000. It can make your business look more professional, and you might be able to reclaim funds on your own purchases.
Think of VAT as a cycle:
Charge VAT on Sales: You add VAT to the total price when you sell VAT-applicable goods or services. This is known as output VAT. For example, if you sell a product for £10 and the VAT rate is 20%, the total price becomes £12.
Reclaim VAT on Purchases: When you buy goods or services for your business, you might pay input VAT. If you’re VAT-registered, you can reclaim this from HMRC.
Pay the Difference to HMRC: At the end of your VAT accounting period, you calculate how much output VAT you’ve collected and subtract the input VAT you’ve paid. The difference goes to HMRC.
The good news is that if your input VAT is the higher of the two, HMRC owes you!
Not everything is taxed the same way. Here’s the breakdown:
Standard Rate (20%) – Most goods and services.
Reduced Rate (5%) – Goods and services like home energy and children’s car seats.
Zero Rate (0%) – Goods like basic food, children’s clothing and newspapers.
Exempt – Services like insurance, healthcare and education.
You can register online through the HMRC website. They’ll set you up with a VAT number and an online account where you can submit your returns easily. Once registered, you’ll need to:
Add VAT to your invoices.
Keep detailed records of your sales and purchases.
Submit VAT returns every quarter.
Keep detailed records of your sales, purchases and VAT invoices. Automated accounting software can save you headaches. But remember, the VAT you collect isn’t yours to keep. Set it aside so you’re not caught short when it’s time to pay the taxman.
VAT returns are typically due every three months, with missed deadlines likely to lead to fines.
HMRC offers special schemes that might suit your business, such as:
Flat Rate Scheme: Makes VAT calculations more straightforward but might not save money if you have high input VAT.
Cash Accounting Scheme: Keep cash flow running smoothly by paying VAT based on when you receive payments rather than when you issue invoices.
Annual Accounting Scheme: Submit one VAT return annually instead of four quarterly submissions throughout the year.
Keep your business transactions separate from your personal finances. Use a dedicated business bank account from a reputable provider to make tracking VAT a breeze.
A VAT invoice needs specific information, like your VAT number and a breakdown. Use a template to ensure you get it right. If you’re over the VAT threshold and fail to register, HMRC could hit you with penalties and a backdated bill.
If VAT still makes your head spin, don’t go it alone. A professional accountant or tax advisor can help you register, confirm that your VAT returns are correct and advise you on VAT schemes to save your business time and money.
VAT might seem like a big beast or a tedious task, but it's manageable with the right understanding. Remember, you’re not alone. Stay informed and don’t be afraid to ask for help when needed.
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