VAT: What you need to know when running a small business

Updated on July 19, 2022

Value Added Tax (VAT) is a regular component on many invoices and bills.. Does VAT matter to small enterprises, on the other hand? Is it mandatory for all businesses to charge VAT? What are the advantages and disadvantages of registering for VAT?

Many of our clients ask us these kinds of inquiries on a daily basis.

What is VAT and why is it vital for your business? Is it necessary to get VAT registered?

With this information, you’ll be able to make the proper decisions to help your company develop.

What is VAT?

VAT, short for Value Added Tax, refers to a percentage fee paid by customers when purchasing certain products and services in the European Union (EU).

Similar concepts are known by different names around the world.

The Australian Goods and Services Tax (AGST) is an example (GST). We’ll stick to VAT because we provide accounting services to UK firms.

Most products and services in the United Kingdom have been subject to a 20% VAT charge since January 2011.

For example, the zero-rate VAT applies to children’s apparel and footwear.

Here we’ll look at the general benefits and drawbacks of having VAT registered rather than the finer intricacies of how VAT is levied, so that you can see what matters most to your small business.

Because it’s a widely held belief that all businesses are required to charge VAT, it’s no wonder that many people considering establishing their own business believe they must register with HMRC for VAT purposes.

In reality, this isn’t the case.

Many small enterprises do not need to register for VAT.

VAT fact

VAT registration is mandatory for firms in the United Kingdom only if their annual taxable revenue exceeds the VAT threshold.

In the form of budget statements, the Chancellor frequently informs the public of any changes to this value.

After 1 April 2020, the VAT threshold of £85,000 will be phased out. Refreshed: (January 7, 2020)

The threshold for registering for VAT does not matter if your annual turnover is less than that amount.

It’s up to you to decide what you want to do.

Why would I register for VAT if I don’t have to?

If you’re not legally required to register for VAT, you may question why you’d bother.

By registering, you agree to submit VAT returns to HMRC on a regular basis and raise your prices for clients.

If you could avoid it, wouldn’t it be better?

Yes and no, of course.

As business owners, we have a natural desire to reduce the amount of paperwork we have to deal with.

We also don’t want to overcharge our customers, because in today’s market, pricing is critical.

You can also gain an impression of authority and permanency by being VAT registered.

Most or all of your clients’ VAT payments may be reclaimable if they are registered enterprises.

If that’s the case, they may not be too concerned about the VAT portion of what they pay you because they can get back some or all of it.

Another reason to register for VAT is that it can save you money in the long run.

By registering, your clients and competition will not be able to see how much money you make each year.

Without VAT registration, however, you are telling the world that your yearly revenue is smaller than that which triggers registration.

Many times, it won’t make any difference. However, some potential customers may prefer to deal with a VAT-registered business, especially if they plan to spend a significant amount of money with you.

VAT registration is one of the most common reasons to do so early on in the process of setting up a new business (i.e. before the threshold for registering has been met). For example, a new coffee shop may have to invest a large amount of money to build a cafe and acquire the necessary supplies. It’s possible to get VAT back on these expenses, which would allow the company to get its money sooner rather than waiting until sales reach £85,000.

In the past, we’ve talked about the downsides of registering for VAT. You must account for VAT on all taxable income, regardless matter who the client is, and submit VAT returns to HMRC four times a year.

If your yearly revenue exceeds the VAT threshold, you must register for VAT as a matter of law.

Do I have to register for VAT even if I’m a sole trader?

Your annual turnover must meet the VAT threshold for you to pay VAT. VAT registration is mandatory for all businesses, including sole proprietorships and partnerships.

If a sole proprietor’s annual turnover reaches the VAT threshold, he or she must register for VAT.

If your annual revenue falls below the VAT level, you are not required to register for VAT, but you can if you like.

How do I register for VAT?

The VAT registration pages on Gov.uk allow you to complete the VAT registration process.

This holds true regardless of whether you choose to register willingly or are required to do so (because your annual turnover exceeds the VAT threshold).

How does VAT work once my business is VAT registered?

Following registration for VAT, you will have access to the section of Gov.uk on which you can file your VAT returns.

According to the rules of VAT, you’ll need to enter onto the website four times a year and complete an online VAT return for each of those periods.

A VAT number will be provided to you. On every sales invoices you issue after that, you’ll need to include this information Before you become VAT registered, you didn’t have to bother about altering or re-issuing any invoices. As a result, it’s critical that you keep track of the date on which your VAT registration went into effect.

In addition to including your VAT number on your invoices, you must also provide the applicable VAT charges. Most of the time, this means adding 20% (the current VAT rate) to the net price.

Each quarter, you’ll be required to complete your VAT return by logging into the Gov.uk site. This is where the VAT you’ve charged HMRC is stated.

Your income (which includes the VAT you’ve charged for your products and services) and expenses (which includes the VAT you’ve paid for your products and services) are summarized in your VAT return. Your quarterly VAT return will be based on the difference between these two numbers.

The most frequent method of registering for and managing a VAT account is covered in the above summary.

The Flat Rate Scheme and the cash-accounting approach are two alternative options for handling VAT. In-depth discussion of these is beyond the scope of this essay, which can only touch on the most salient aspects. However, if you’d want some guidance on which approach is ideal for your small business, we can talk about it over the course of a phone session.

Do VAT rules differ across the UK?

No. The VAT laws are the same all around the UK, regardless of where you live. There are no differences between thresholds, percentages, or the various shapes they take.

The good news is that our VAT advisory service can provide you with the same level of impartial guidance no matter where your business is located in the United Kingdom.

What if I have questions about VAT?

HM Revenue and Customs (HMRC) provides a wealth of information regarding VAT and VAT registration on its website.

A phone call to HMRC’s customer service department is typically the best way to get answers to specific questions. Do not anticipate a professional personal consultation that covers all of your financial questions to be answered during your phone call.

Despite the fact that we are unable to provide particular advice at this time, we have extensive expertise assisting start-up companies. In order to help you understand how VAT may apply to your business, we recommend that you schedule a consultation call with us. Get in contact with Alan below to learn more.

You must take the road that you believe is best for you, just like you do with any other major decision. We’re here to make sure you have all the information you need to make an informed decision that benefits both you and your business.

Visit our VAT page to learn more about our firm’s tax and VAT advisory services.