Some will have to register right away, , while others might decide to do so further down the track.
If you are thinking of registering for VAT, then here are the basics which you need to know to get started.
What is VAT?
Value-added tax, or VAT, is a tax you charge directly to your customers on most goods and services sold in the UK. You are then required to report and pay VAT on to HMRC on a quarterly (or sometimes annual) basis.
However, as a VAT-registered business you can, in most cases, deduct the value of the VAT you have been charged yourself on most of your outgoings.
When to register for VAT
The turnover threshold at which businesses must register for VAT is currently £85,000, as of the 2021/22 tax year.
If your turnover is above this, is about to go over it within 30 days or you purchase a VAT-registered business, then you must register your business on the scheme.
However, you can voluntarily register for VAT below the threshold too. But why would anyone do this? Surely it’s just going to add more stress to a business’s accounting?
It primarily comes down to the fact that you can reclaim VAT on most business expenses – taking 20% off their cost for you.
This does, however, make your invoices 20% more expensive but this won’t matter if your customers are VAT registered themselves; they can claim it back. But if your customers are not VAT registered, then you may become uncompetitive.
VAT does come with extra administration and compliance risk, but you may find that it gives you an added air of certainty and organisation.
Different VAT rates and schemes
Whether you’re buying or selling goods, the main rate of VAT is 20%, although there is a whole register of goods and services for which VAT is lower – at 5% or 0%.
There are also three different categories of goods and services where VAT is not charged, described as ‘zero-rated’, ‘exempt’ or ‘outside the scope’.
Then, there are three alternative VAT schemes to consider for smaller businesses, other than the main scheme already broadly outlined.
The ‘VAT flat-rate scheme’ sees you charge VAT as normal. But rather than paying HMRC the VAT you’ve charged net of the VAT you’ve spent, you get to keep a small percentage of what you’ve charged and don’t deduct the VAT on expenditure. This may be attractive if you have virtually no VATable costs.
The ‘VAT cash accounting scheme’ can be useful for cashflow, as your payments to HMRC are based on the money received and spent instead of just the invoices filed.
The VAT annual accounting scheme’, meanwhile, lets you pay and report annually as opposed to quarterly like the other schemes.
Registering for VAT and Making Tax Digital (MTD)
If you’re going to register for VAT with HMRC, you’ll need to provide information such as your national insurance number or unique taxpayer reference, incorporation details and business bank account details.
There is no fee from HMRC to set up, although many businesses choose to register through their accountants.
Nowadays, it’s natural for people to register online, but a postal option is available in certain circumstances.
However, from April 2022, all businesses will be required to comply with Making Tax Digital (MTD) rules – HMRC’s initiative to make the tax system more efficient through digitalisation.
These rules require that VAT reporting is done through accounting software like Xero, Sage or QuickBooks rather than directly with HMRC.
This is no real burden, as such software brings powerful benefits and efficiencies to businesses. In fact, many smaller businesses already choose to comply with MTD now, even though it is currently only mandatory for companies who turnover more than £85,000 (until April 2022).
So as you can see, there is a bit to consider before registering. If you need help exploring your options with VAT and getting set up, please get in touch.
We can help you identify the best approach for your business and comply with the scheme.