Value Added Tax (VAT) is a tax on goods and services that is collected at the point of sale. It is an indirect tax, which means it is not directly paid by the consumer but is instead included in the price of goods and services. The tax is only paid if you buy the goods or services. For small businesses, VAT can be a complicated and confusing topic, but it is important to understand its implications to ensure compliance with the law and avoid penalties.
In the UK, businesses with a turnover of over £85,000 must register for VAT and start charging VAT on their goods and services. If your small business is below this threshold, you can choose to register for VAT voluntarily. This can be beneficial if your customers are VAT registered and can claim back the VAT you charge. You will then be able to reclaim the VAT on your purchases. VAT registration can give the impression that your small business is more established than perhaps it is. You can read more about VAT thresholds in our business guide.
Registering for VAT also means you have to keep detailed records of all your transactions and submit regular VAT returns to HM Revenue and Customs (HMRC). VAT submissions must now be made through the Making Tax Digital (MTD) programme via digital record keeping and the use of approved software often referred to as Cloud Accounting.
Once you are registered for VAT, you will need to charge VAT on your sales, but you can reclaim VAT on your purchases. The standard rate of VAT in the UK is currently 20%, but there are also reduced rates of 5% and 0% for certain goods and services. It is important to ensure you are charging the correct rate of VAT, as charging too little can lead to fines and charging too much can damage your reputation with customers.
One of the biggest challenges for small businesses is cash flow. When you charge VAT on your sales / services, you must pay this over to HMRC usually on a quarterly basis. This can be a significant amount of money, particularly if your customers have credit terms with you so not all sales invoices have been settled by the time you have to make a payment to HMRC. This can put a significant strain on your finances. To help with this, HMRC allows you to adopt their cash accounting method.
Another important consideration for small businesses is record keeping. Under VAT law, you are required to keep accurate records of all your VAT transactions for at least six years. This includes invoices, receipts, and any other relevant documentation. Keeping good records can help you to manage your VAT obligations more effectively and avoid penalties for non-compliance.
It may be advisable to seek professional advice from an accountant or tax specialist to ensure you are complying with VAT regulations and maximising the benefits for your business.
Accountancy practices can play an important role in helping small businesses with VAT. Here are some ways in which they can help:
- VAT registration: Accountants can assist small businesses in registering for VAT if they are eligible. They can provide guidance on whether or not a business should register, and if so, which scheme is most appropriate.
- VAT returns: Accountants can help small businesses in preparing and submitting their VAT returns. This includes calculating the amount of VAT owed or reclaimable, ensuring that all relevant transactions are included, and submitting the returns to HM Revenue and Customs on time.
- Record keeping: Accountants can advise small businesses on how to keep accurate records of their VAT transactions, including sales and purchases. This helps ensure that the VAT returns are accurate and complete. This includes advice on the selection, setup and use of approved software to meet the Making Tax Digital (MTD) requirements.
- VAT inspections: In the event of a VAT inspection, accountants can provide guidance and support to small businesses. They can help ensure that the business is complying with all relevant regulations and provide assistance in responding to any queries or requests from HM Revenue and Customs.
- VAT planning: Accountants can assist small businesses in developing a VAT planning strategy. This involves reviewing the business's operations and identifying areas where VAT savings can be made.
In summary, a good accountancy practice can provide valuable support to small businesses with VAT, helping them to meet their obligations and make the most of VAT opportunities.
To talk to us about how we can help you with your VAT requirements, please call 0121 474 2683 or use our contact form.