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Should I Register My Business For VAT?

Updated on December 30, 2016

Is Your Business VAT Registered?

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Firstly, What is VAT?

VAT stands for Value Added Tax. The name itself puts a lot of small business owners off, but don't be too hasty as registering can actually benefit your business financially. VAT currently stands at 20%, and this represents the amount that's added on to any works undertaken. For example, a job which you'd usually charge at £10.00 would have an extra £2.00 of VAT on top. Most people are used to paying this extra amount, and commercial clients can actually claim the VAT they've paid out back (more on this later).

Watch out though, VAT definitely isn't a bonus so don't go spending it! Any and all monies collected in the form of Value Added Tax are surrendered to the Government in the form of a VAT Return. Essentially, your company works as a tax collector on behalf of HMRC.

Do I Need To Register?

You must register for VAT if your business has exceeded the yearly turnover threshold, which currently stands at £83,000. This is a legal requirement and fines may be imposed on companies that do not register.

For a business that is below the threshold level, the decision of whether to register for VAT or not is entirely at your own discretion.

Some businesses are completely exempt or get varying rates of VAT. For more information on rates visit the HMRC website.

Pros and Cons of Being VAT Registered

Pros:

  • You can charge VAT on the goods and/or services that your business provides. This is called output tax, and is perhaps the most fundamental reason for registering. Even for those still under the threshold, voluntary registration gives the impression that your company is larger and more established. Many clients may actually be wary of trading with a company that isn't VAT registered.
  • Your company can reclaim the VAT they have paid out on goods and/or services, this is called input tax.
  • Voluntary VAT registration can be backdated by up to 4 years, so if all your paperwork is in order and you can show it to HMRC, your business may be able to reclaim any and all VAT paid out in this period.

Cons:

  • Paperwork! Businesses must maintain accurate VAT accounting records and invoices, keep track of all those pesky receipts and submit a quarterly VAT return.
  • For clients who are not VAT registered, such as domestic households, adding an extra cost to their goods and/or services may make the final cost of sale unreasonable or over-priced.
  • A large VAT bill may be accrued if your businesses sales outweigh the purchases that can be reclaimed.

How Does My Company Reclaim VAT?

VAT can almost always be reclaimed on any goods and/or services that are purchased for business use, even if they were bought before your business was VAT registered.

If you've paid for something that's for both personal and business use, such as telephone line rental, phone calls or Internet costs, the VAT can only be reclaimed proportionately. As an example, in a private residence that's also used for business purposes, the cost of the utility bill can be split between what the office uses and what the rest of the household usage is.

The method for working out what percentage of your house is used as office space is quite simple. For example, if your home is a total of 1000 square feet and your home office uses 200 square feet, your office space equates to 20% of the total area of your home. This means your business should be able to claim the VAT back on 20% of the total household utility bill.

The key is to keep any and all records along with valid VAT invoices to support any claims you make. HMRC will also want you to show how you reached the figures for the VAT you are reclaiming.

Businesses cannot reclaim VAT on:

  • Goods and/or services bought exclusively for private use.
  • Entertainment costs, goods and services used to make VAT exempt supplies.
  • Products purchased from other EU countries, receiving business assets that are transferred as a going concern.
  • Anything purchased under a VAT second-hand margin scheme.

Any repayments should be made within 10 days of HMRC receiving your VAT Return. However, if you've not heard anything by day 21 you should contact HMRC, and if by day 30 you've still not received a repayment your business may be entitled to compensation in the form of a repayment supplement.

The Flat Rate Scheme

Introduced in 2002 the Flat Rate Scheme, or FRS, was designed to reduce the administrative burden on small businesses (only those with a turnover of less than £150,000) by allowing them to pay VAT at a fixed rate. This means that whilst your business still charges it's clients VAT on goods and/or services at 20%, you only have to pay a certain percentage back. This means that businesses can keep the monetary difference between what they charge and what they pay in VAT, however they can only reclaim VAT on the purchase of capital assets over £2,000.

Different business types pay different percentages as part of the Flat Rate Scheme. For example companies involved in accountancy and bookkeeping pay 14.5% whereas those involved in retailing, newspapers, confectionary and children's clothing only pay 4%.

Ready to Register?

Go direct to the HMRC website to register your business for VAT. Don't worry, it's not too difficult but it can take up to two weeks for your application to be processed.

If you're still looking for advice on the matter, any good accountant will be able to talk through your options with you. Or, if you'd rather speak to someone at HMRC about VAT call: 0300 200 3700.

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All information was correct at time of writing 30/12/2016.

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