As I’m sure you are aware; VAT is one of the key tax factors and considerations for any business of any size. It is irreverent of where your company stands on the spectrum of size and affluence, as every business owner needs to understand the importance and impact that VAT has on their business.
What is VAT?
VAT or value added tax is a consumption tax implemented in the UK, and the standard rate of VAT is 20 per cent. There are examples of items that are exempt from tax, for example financial transactions and property.
Within the small business environment within the UK, VAT is practically the number one key consideration in UK taxation. We’ve decided to simplify what you need to know about VAT, by breaking this down into three main ways in which VAT effects your company:
Registering for VAT
To put it simply, you are legally obliged to ensure you are VAT registered if your company’s turnover exceeds £85,000 in a 12 month period. Another key aspect to understand, is that you also must register for VAT if you buy goods for more than £85,000 from a VAT registered supplier within the EU (even if you only sell VAT exempt goods).
As a small business owner, you may well be in a position whereby registering for VAT isn’t applicable. Well, you can register your VAT even if your turnover doesn’t reach the revenue threshold. This would mean that you are registering for VAT ‘voluntarily’. There are commonly three reasons why business would typically do this:
- To project a perception that the company is in fact larger than it really is (for example this might be a ploy to secure investment)
- To fundamentally build trust (prospective clients/suppliers/partners may well feel more at ease)
- So the business could save money if they spend more on VAT then it actually takes in.
Once you are registered for VAT, you will then have to complete your VAT returns, which is completed once every three months, and is commonly known as your accounting period.
While completing your VAT returns, you will need to record sales and purchased, and included the VAT that you owe and also what you can then reclaim. Following this, it will then be possible to determine whether you will are due a refund or needing to make a claim.
Again, once you are VAT registered, you must ensure that you add VAT to cost of goods and services that are VAT taxable. Following this, you must also ensure that your VAT number (9 digits long) is visible on receipts and invoices.
VAT that has been paid on goods and services for your business, can be claimed back, so once you’ve paid a VAT bill, you will pay the difference between what you’ve taken in and paid out.
As I’m sure you’re aware, it’s crucial that you retain records involving VAT. Examples include keeping invoices and receipts, and for any backdated claims, it’s ideal to have details of how purchases relate to your business.
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This post was written by Chris Beck