Big goals are good. No, big goals are GREAT. But with big goals & ultimately big achievements in your business, comes BIG responsibility.
You can expect to acquaint yourself with a new friend.
Well ok, more like a new enemy. One that maybe if you’re hitting those big goals, you can’t run your business without.
Value Added Tax. AKA VAT.
You and VAT are like Sherlock & Moriarty (you figure out which one you’re represented by). They hate each other. But they can’t get rid of each other. And to be honest, they don’t really want to.
BUT
How do you outsmart your enemy? By learning all there is to know about them. Always staying one step ahead and not being caught in their traps. So put your deerstalker on and grab your magnifying glass. It’s time to educate yourself.
What is VAT?
VAT is a business tax charged by the government on sales of goods and services, as well as on commissions and business assets. The standard rate of VAT in the UK is 20% however there is a reduced rate of 5% charged on things like children’s car seats and energy. It’s good to note that on somethings there is no VAT at all. That would include most supermarket food, children’s clothing, news papers and magazines. And travelling? Things like flights and train tickets are zero rated for VAT. For a full list of what’s what, go to HMRC’s website.
Do I have to charge it?
Businesses with an annual turnover of more than £85,000 have to register for VAT. It’s worth noting that the “annual” part is not fixed; it’s a rolling 12 month period. So for example, if between Jan 21 and December 21 your turnover was £83,000 within that time frame, it wouldn’t reset when Jan 22 comes. You will also have to register if you are expected to pass the threshold within the next 30 days.
Businesses that turnover less than £85,000 can register voluntarily for VAT unless what they sell is VAT exempt.
I don’t meet the threshold; should I register anyway?
Depending on your business type, it can have it’s advantages. If you have an expense heavy business, claiming back the VAT you pay on supplies potentially can help improve your cash flow. If your business doesn’t sell to VAT registered customers or sells only to consumers, it could be bad for you. Do the research. And do th
e maths.
Ok, I’ve just registered for VAT; what do I do next?
You have obligations you need fulfil. These include:
Charging VAT on the goods and services you sell. The rate will depend on what you sell, but the standard rate is 20%. If you sell a £100 service, you’ll need to add £20 for VAT. VAT is not paid on profit but on turnover.
Pay Vat on goods and services bought from other businesses. Not all will be VAT registered, but for those that are, ensure you ask for a VAT invoice. If they are VAT registered, their VAT number will be clearly displayed as something similar to GBxxxxxxx.
Complete a VAT return every quarter AND make sure you have VAT compatible filing software.
But it doesn’t end there. The VAT you charge your custome
rs is not yours. That belongs to HMRC. In order to not tempt yourself, set up a high interest bank account to stick all your VAT in ready fo when you need to file and pay.
AND the VAT you charge customers, and the VAT you pay on things you have bought should balance out, with you either paying or receiving the difference depending. Yes you read that right. Sometimes HMRC pay you!
VAT registration also offers you some benefits. It can add credibility to your business, making your business appear a larger set up than it actually is. As well, some companies may only deal with VAT registered businesses – so it opens you up to whole new set of customers.
Right. So is it as easy as just registering?
Ha. It’s never as easy as just registering. When does your enemy ever make it easy for you? Never. When it comes to VAT it’s no different. There are a fair few VAT schemes to choose from (the way you pay VAT and what and how you can claim) depending on your annual turnover and your business type so you want to make sure that you choose the right one for you. So what are they?
Standard Rate Scheme
When you register for VAT, one of the options you have when it comes to choosing which scheme is suitable for you, is the Standard Rate VAT scheme. This means you can reclaim VAT on on every eligible product or service you buy or sell. Here is what you need to know:
· Suitable for lots of businesses
· May be mandatory for businesses with a certain turnover or business type
· Mandatory for those who import goods from the EU exceeding £85,000
· Your responsibility to send a quarterly return to HMRC letting them know what VAT you have charged and paid.
Flat rate scheme
The Flate rate VAT scheme has been set up to simplify the VAT process for small businesses as well as freelancers. When using the flat rate VAT scheme, you pay a percentage of your turnover to HMRC with set rates. The rates are determined based on your business sector and that rate is used for all VAT transactions. Here is what you need to know:
· Suitable for businesses with an annual turnover of £150,000 or less
· Rates chosen based on your business sector
· Unable to claim back VAT on purchases made.
Accounting & Annual Accounting Scheme
Lots of small businesses choose the Accounting scheme, which means you only need to tell HMRC about the VAT income received during that quarter. BUT you cannot claim
VAT back on invoices that you haven’t paid yet. If your turnover is more than £1.35 million, you cannot use this scheme.
With the Annual Accounting scheme, you can make advance payments towards your VAT bill throughout the year. What that means is one VAT return a year. Again, you are good to use this scheme if your turnover is less than that £1.35 million a year.
What next?
So now you know your enemy Sherlock. And it seems that Moriarty has struck again.
Damn.
BUT it’s not over yet. You can exact your revenge. How?
GOOD RECORD KEEPING.
HMRC requires you to keep all information for VAT from invoices to receipts for at least six years. If you use the VAT Mini One Stop Shop scheme, which is when you report and pay VAT due on the sales of digital services to customers within the European union, then you need to keep all records for at least 10 years. So you need an organised system in place to be able to do so.
On top of that, with the introduction of Making Tax Digital you need to make sure you find yourself MTD compatible VAT filing software, like QuickBooks Online. With a software like this, you can keep all your records digitally reducing the need for physical storage. Want to find out more? Talk to us today.
VAT doesn’t have to be difficult. And we can help. From co
mpatible software, to registration, to choosing the right scheme and filing the returns, we have got you covered.
Remember, Sherlock worked with Watson and Watson kept Sherlock on track. Talk to us to find out how we can do the same.
Happy Wednesday folks!