I want to get one thing out in the open. VAT isn’t a scary word. I promise! VAT (or Value Added Tax) is just another part of running a business in the UK. Most businesses that sell any kind of physical product in the UK have to be VAT registered, and quite a lot that offer services do too once they go past the earnings threshold. So while it doesn’t apply to all businesses, it is something every business owner should be aware of and have a plan for. Especially as you can reclaim the VAT you pay on business expenses once you’re registered! It’s also important to remember that the VAT you charge isn’t actually your money to spend. You’re essentially acting like a bank account for HMRC until you pay it, which often trips people up.
But HMRC don’t like to make things simple, so there isn’t just one VAT scheme. There are 4. So how do you know which one is best for your business?
When Should You Register for VAT?
Once your business reaches a certain income threshold, you will be required to register for VAT. The threshold is based on taxable turnover, not income, and it changes slightly with every new tax year. So rather than give you a figure, I suggest you click here to find out what the threshold is at the moment. You only have 30 days from when you hit the threshold to register, so it’s worth monitoring as soon as you realise you’re getting close.
But did you know that you don’t have to wait? While that threshold is the legal trigger for registering, you can register for VAT before that if you want to. There are a few pros and cons to this.
Advantages
- You can reclaim VAT you paid for business purposes, which helps save you money.
- It looks professional, and can make you more attractive to bigger businesses.
- When you register you can go back and claim 4 years VAT on goods (if they’re still in date at registration), and 6 months VAT on services like utilities.
Disadvantages
- You’ll have to charge more, as you need to add VAT onto your prices.
- Your accounting will be more complicated.
Choosing a VAT Scheme
When you’re registering for VAT, you’ll be asked which scheme you want to use. The schemes are essentially a way of telling the government how much VAT you’ve charged, and how much you’ve paid. There are 4 VAT schemes you can choose from, though not every business is eligible to use all of them.
Standard VAT Account Method: This is the most common way of tracking VAT (hence it’s called ‘standard’), and essentially means keeping a detailed VAT record of all purchases and sales your business makes. This can be easily done through your accounting software. You then use that information to complete your VAT returns every quarter.
Annual Accounting VAT Scheme: This method is just like the standard method, except you don’t need to fill in a return once a quarter. Instead, you’ll need to file an annual VAT report and payment deadline, which you can do through an online form. Of course, while you can make one annual payment, I would recommend making them quarterly to spread the cost of your VAT payments across the year and lessen the shock of the bill!
Flat Rate Scheme: After some changes to stop contractors from using the scheme to make a profit, the flat rate scheme is now the preferred option for businesses that sell products. In this scheme, you pay a percentage of your total turnover as VAT. The actual amount you pay depends on the industry you’re in, as each has its own rate. You can find out what yours is here. You’ll still have to add VAT on your invoices, but you don’t have to account for the VAT on every purchase. However, it’s important to know that you can’t use this scheme if your business turnover is above £150,000, and if you’re in the flat rate for businesses with limited costs (16.5%), you might end up under or overpaying HMRC at times. Which means you might end up having to make a final payment or even get a refund!
Cash Accounting Scheme: Here, you account for the VAT on the date you’re paid, instead of the date on the invoice. Which can be a bit confusing at first, but makes sense when you get used to it. This is useful if you have slow-paying clients, since you won’t have to pay the VAT before you’ve received the money. But if you buy a lot of things on credit, then this scheme won’t work well for you, since you can’t reclaim the VAT until the payment’s been completed. So if it takes you 3 months to pay off the purchase, then you can’t reclaim the VAT until that last payment’s been made. And you still have to complete your quarterly returns online. Again, this scheme does have a turnover limit. So if you make over £1.35m, you can’t use this scheme.
One piece of advice I have is to create a separate ‘savings pot’ – either with another account or a subsection if your bank allows it – to put your VAT into. Once an invoice is paid, move the VAT into that separate pot. This significantly reduces stress, as your VAT bill should be similar to the amount you’ve got in the pot. I know it sounds like there’s a lot of form-filling-in and complicated calculations that need to be done, but it’s not as bad as it sounds. And you don’t need to be the one doing it! At Bluebell Bookkeeping and Admin, my job is to make sure your books are in good shape and prepared for filing your VAT returns. While I can’t do the physical filing for you, I can make sure everything is ready and in order for you to press the right buttons. If you’d like to know more, or if you need some help getting set up for VAT and preparing your returns, give me a call – I’d love to help.