What is VAT and how does it affect my small business?

Updated on July 20, 2022

What does VAT stand for? How to register, what the rates are, how much you pay and how much you owe, and how to deregister are all covered here.

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What does VAT stand for? Most suppliers of products and services impose VAT, or value-added tax, on the goods and services they sell.

Self-employed people can provide supplies for businesses, as sell as selling items, renting and hiring commodities and stock, offering services such as hairdressing, and charging an admission fee for buildings.

What VAT rates are there and how do they differ?

By product and service, the value-added tax (VAT) rate varies (VAT). Our company is divided into the four divisions shown below, from top to bottom:

Be prepared for a few hiccups.

This package includes everything from dental and medical care to educational opportunities (but not some other services, such as osteopaths). Products and services that are exempt from taxation are not taxed. Registration for VAT is not required in order to provide tax-exempt services.

If a VAT-registered business makes some exempt supplies, it may be difficult to recoup input taxes.
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Pharmaceuticals, books and magazines, new home purchases, and children’s shoes and apparel are all subject to a six percent tax. Requesting an exemption from VAT registration may be possible if all of your products are zero-rated.
Make the most of your savings! Individuals and non-profit organizations alike pay a 5% power tax.
This store’s standard cost applies to all non-category items. It presently stands at about 20%.

Consumer confidence was increased once the tax was decreased from 20% to 15% in 2008.

On January 4, 2011, tax rates in the UK were raised from 17.5 percent to 20 percent in an effort to reduce the country’s fiscal deficit.
If your taxable revenue exceeds £85,000, you must register for VAT in the United Kingdom.

You don’t have to consider the value of any sold capital assets or exempt supplies when considering whether or not to register.

A fee or tax withholding may be imposed if you wait too long to register. It is punishable by hefty fines and penalties for individuals who fail to register or pay taxes on time.

Customer refunds frequently exceed the amount of VAT businesses owe to suppliers.

Every three months, they submit a VAT return to HMRC and pay any VAT overpayments they have made. If you are required to register for VAT, every sale you make of goods or services must be documented.

Understanding output tax and input tax

When you bill customers for those goods and services, the tax you collect is your output tax.

As long as your customers are VAT-registered, they’ll be able to claim the VAT you charge as an input tax on their purchases.

When you pay your suppliers for company purchases and expenses, you have paid VAT, which is known as input tax. All of the above, such as VAT on raw materials and products you buy to resell and payments for professional services such as accountants’ fees are included in this category.

You can get a monthly refund from HMRC if you consistently pay more VAT than you collect.

However, you cannot claim input tax on some cars, some entertainment costs, or if you just provide exempt items and services..

Remember that you, not your company, are registered for VAT.

You simply need to register once, and one registration covers your entire company.

Check your taxable revenue to check if registration is required if you purchased your business in the course of doing business. Your registration date will be the date when you take over the business. VAT registration may be transferable if the previous owner was already registered.

When can you deregister from VAT?

You can terminate your VAT registration if your business’s annual turnover falls below a specified threshold.

The maximum amount that can be deregistered at the moment is £81,000.

What is the Cash Accounting Scheme for VAT?

VAT laws are evolving, year by year, to make the arduous job of registering and filling in VAT returns easier.

There are currently dedicated programs to make life easier for small and medium sized firms.

The Cash Accounting Scheme for VAT lets you account for VAT on the basis of payments you have made and received, instead of on the basis of invoices issued.

This means that you automatically have bad debt relief and it also helps if you allow periods of credit or have late payers.

The Cash Accounting Scheme limit applies to enterprises having a turnover of up to £1.35m. You can use the scheme till your turnover reached £1.6m.

Annual accounting removes the burden of quarterly tax returns from small enterprises. Once you have been VAT registered for a year, you can put in just one annual return and pay monthly by direct debit.

What records do you have to keep for VAT?

You need to keep precise records for VAT purposes, just like you do for the HMRC.

In order to prove your business activities, you’ll want to maintain track of all of your financial records and receipts. You should also keep your personal and company finances separate.

The supplies you make and receive, as well as a breakdown of your VAT for each tax period covered by your tax returns, must be documented for VAT purposes. For six years, you must maintain all of your records if you have registered for VAT.

Because of the severe fines for not keeping records, many businesses choose to hire an accountant or at least a bookkeeper to alleviate the paperwork burden off their shoulders and give them more time to focus on running their business.

It is easy to presume that a builder who requests payment in cash is being dishonest with the taxman. However, he may have a more pressing concern on his mind – avoiding VAT, which is the scourge of many small business owners.

When small businesses express their displeasure with regulatory costs, John Davies, head of business law at the Association of Certified and Chartered Accountants, says that VAT is frequently mentioned. The government, however, is now trying to make it easier for small and medium sized businesses to deal with VAT.

The VAT registration threshold is being raised on a regular basis. VAT registration is required if you’ve had taxable turnover of more than £85,000 in a year, or if the value of your taxable supply is expected to surpass that amount in the next 30 days.

A seasonal firm, such as one that generates most of its money over the holidays, might easily go over the limit, even if it sounds like a lot. Small contractors who deal in pricey materials but have a relatively low profit margin may be required to register for VAT because the registration reflects turnover rather than profit.

Those who complain about working for the government as an unpaid tax collector are entitled to compensation.

Some people find that voluntarily registering for VAT before they reach the threshold of mandatory VAT registration saves them money. New legislation has made VAT returns easier as well.

Here, you may learn more about how to apply for VAT.