Knowing whether you should claim for VAT can be a minefield. How do you know if it is in your businesses’ favour to register for VAT? Will you lose or save money? Is your registration voluntary or is it compulsory?
Unless you are a qualified accountant it can seem baffling. Luckily, here at A Wilson Accounting we have put together this blog which will help you to understand and cover the basics of VAT and what you would need to know before you consider registering.
So How Does VAT Work?
VAT is a tax paid by VAT registered companies. If you are VAT registered, you essentially collect the tax for HMRC and then file all the information in a VAT return every 3 months. VAT registered businesses will add VAT to their goods which will then be paid by the customer. It is then the businesses’ responsibility to pay this additional income to HMRC.
Seems pointless? Well this is the good bit. If you are VAT registered, you can also claim VAT back when you buy items from other VAT registered businesses. So, you could essentially be saving money compared to not being VAT registered.
Who Needs to Register?
There are two kinds of VAT registration; voluntary and involuntary. If your business has a turnover of over £85,000 then you must register for VAT, or face fines from HMRC. If your turnover is below this then you may be able to register for VAT voluntarily.
VAT registration is not only available to limited companies; it is open to anyone – sole trader or limited company.
If your turnover is above the £85,000 threshold in a 12 month period, you must register for VAT or be subject to fines from HMRC. You must also register for VAT if you receive goods in the UK from the EU worth more than £85,000 or if you expect to go over the threshold in a single 30 day period.
If your company has a turnover of below £85,000 then you may still consider VAT registration for many reasons. Not only can you save money, but you will also avoid fines, boosting your businesses’ profile and be given a VAT registration number – which can be shown on your website and increase your credibility to customers.
Who Cannot Register
If your business only sells or supplies goods that are exempt from VAT, then you cannot register for VAT or recover any VAT you incur on purchases and expenses.
Exempt goods and services include:
- Insurance, finance and credit
- Education and training
- Fundraising events by charities
- Subscriptions to membership organisations
- Selling, leasing and letting of commercial land and buildings (can be waived)
When Would You Register
To avoid a penalty, you must register within 30 days of your business turnover exceeding the threshold. If you do register late you must pay what you owe from when you should have registered.
How Would You Register
If you know that you do need to register for VAT, there are certain details you need to provide. You will need to include your turnover, business activity, and bank details in your application. The date you register will be known as your ‘effective date of registration’ and it’s from this date that you will owe VAT to HMRC.
You must submit a VAT Return every three months (known as accounting period). VAT Returns record your total sales and purchases, the amount of VAT you owe, the amount of VAT you can reclaim and what your VAT refund from HMRC is.
You must submit a VAT Return even if you have no VAT to pay or reclaim.
There are heavy penalties from failing to plan for your VAT Payment. VAT is THE most expensive tax to pay late with penalties escalating from 5% to 15% of the tax not paid. If you think about VAT as money you are collecting on behalf of HMRC – it is not yours to spend, then this may save you being tempted to spend it!
As cash comes in or as you raise invoices and your VAT liability increases, put 20% of the value aside into your VAT account – remember this is not your cash, you are merely the custodian until you must pay it over to HMRC. You can do this daily or weekly, whichever suits you. At the end of the quarter, you will work out your VAT liability, which if you have vatable purchases to offset will be much less than the 20% that you have put aside.
VAT claims on business mileage
Make sure you are not missing out on allowable VAT claim on business mileage. If you are using the HMRC Mileage Allowance Payments (MAPs) to reimburse directors or employees for business mileage travelled in their own car – you can recover VAT on the fuel element of the mileage payment. The easiest way to track your mileage is with an App.
*Watch this space as we will be testing out the top 3 mileage apps very soon!*
If you would like help in registering your company or would like to know anything about being VAT registered: