We see a lot of people panicking about whether to go VAT-registered when they start up their business. We get asked questions about it a lot, and the decision you make can influence your financial success.

We’ve answered all the most frequently asked questions in this post, and added a question that you should be asking, that you might not have considered – what about Making Tax Digital (the biggest change to the tax system in 20 years, that affects all VAT registered businesses)?

But, let’s start with the basics

What is VAT?

When we say VAT, we mean Value Added Tax. VAT is the amount of tax added to the value of goods or service you buy. So, all VAT-registered businesses must charge VAT on the goods and services they provide. The standard VAT rate is 20 per cent, which means you must add 20 percent to all sales. The good news is that VAT-registered businesses can claim back any VAT they are charged. HMRC will offset the amount you are charged against the VAT you owe from making sales of your own.

Can anyone register?

There are some services, like education, that are exempt from VAT. If you only sell goods that are exempt, you don’t need to register.

For a full list of goods and services that are VAT exempt, see here.

Outside of those exempt goods and services, there are 3 different rates of VAT:

Standard Rate

Most goods and services that are aren’t classed as reduced or zero rated.

Reduced Rate

There is a reduced rate of 5% on certain consumer goods, including fuel and energy saving products.

Zero Rate

This means that the goods are still VAT taxable, but the rate of VAT charged to the customer is 0%. Books, newspapers, children’s clothes and shoes all fall under this category.

For a full list of reduced or zero rate goods and services, see here. But do be wary that rates can change!

Does my income have an effect?

Though you can, of course, voluntarily register, if your sales exceed £83,000 per annum, then you must register for VAT. This is the “VAT taxable turnover” so you do need to be aware of how VAT could affect your business as your grow.

Now let’s delve a little deeper…

Why do business owners voluntarily register?

 Though it’s a decision that requires careful consideration, there are some benefits to going VAT registered:

Credibility

Having a VAT number can give the impression that a business is legitimate and larger than it is, which can increase the possibility of obtaining work.

Access to the flat rate VAT scheme

If you’re a business with a low level of outgoings, you can benefit from the flat rate VAT scheme, where you charge VAT to your customers as normal, but only pay a set percentage of your total sale to HMRC, meaning you may make a small profit.

For contractors

If you’re self-employed and find work through an agency, then you may be able to take advantage of the VAT flat rate scheme, because your outgoings are likely to be low. A domestic painter with taxable supplies of £30,000 – it’s not going to be beneficial, whereas a it would be for a commercial or industrial painter with the same level of supplies.

Are there disadvantages?

Along with the benefits, as with most things, there are potential drawbacks. 

Frequent submissions

You will be required to prepare VAT returns on a quarterly basis, and to submit them within one month of the quarter end. Is the amount of work involved worth it for the amount of VAT that can be reclaimed? How you go about reporting is where Making Tax Digital (MTD) comes in…

What does Making Tax Digital mean for VAT?

There are new rules

As mentioned earlier, Making Tax Digital has changed the way VAT returns are submitted to HMRC.

  • From April 2019, all VAT registered businesses above the VAT threshold are required to keep and submit digital accounting records using a software that is compatible with HMRC. Manual records will no longer meet legal requirements.
  • From April 2022, all VAT registered (regardless of income) must file their VAT must file VAT returns digitally through MTD

The reason we didn’t put this directly under ‘disadvantages’ is because, if you do decide the work in completing VAT returns quarterly is worth the return, you shouldn’t be scared away by Making Tax Digital. Though maintaining a digital record of your finances might seem daunting, it can really drive the growth of your business. You’ll have real time access to your figures, allowing you to be constantly monitoring your business’ performance and to make smart informed decisions about improvements that can be made.

It’s a lot to think about, isn’t it.

There are several reason you might want to consult an expert when making this choice:

You’re still unsure if it’s really worth it for your particular business

  • You’ve decided to do it, but you’re not sure where to begin with Making Tax Digital.
  • You’re ready to go VAT registered and you’ve got a good grip on Making Tax Digital, but you’re not sure what kind of software to purchase.

We’ve helped plenty of Business Owners in all of these situations. Don’t be afraid to ask the questions you need to before you make any changes.

Pop your details in the form below and one of our advisers will be in contact with you and can answer any of questions.

Want to find out more?

Call us on (01474) 853856 and we will put you in contact with one of our advisers, or send us an enquiry by clicking below.

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