When it comes to paying taxes and managing accounts, there seems to be a never-ending stream of tasks to do as a self-employed or small business owner. One of those is paying VAT (Value Added Tax), a specific type of tax that only applies to businesses that operate in the EU and that meet a certain set of requirements.
If you employ more than one staff, sell products abroad or own a physical shop, it’s likely you’ll need to pay a VAT bill. If you’re confused as to what VAT is all about, you’re in luck: in this post, we’ll be covering VAT rules, when you need to pay your tax bill and how to register as a small business.
VAT is a consumption tax that is unique to the European Union. Before VAT, countries had to calculate their own taxes, and selling across borders was a bit of a nightmare admin wise.
With VAT, businesses can now purchase and sell products across borders and not worry about the paperwork with all the additional taxes. For this reason, VAT applies to most goods and services that are bought and sold within the EU. Goods that are sold internationally are not subject to VAT.
UK VAT is charged as a percentage of the price of the consumer good and is passed onto the consumer. This means it’s not a business tax - consumers are the ones to pay for it. The VAT rate varies between countries and specific consumer goods. In the UK, VAT is 20%, or 15% or even 0% for certain goods such as children’s items, home energy or medical products.
You need to pay VAT if you are a business with an annual revenue of more than £85,000. If your annual is turnover is less than that, you don’t need to pay VAT.
VAT affects you because if you need to pay it, you’ll need to add VAT onto your prices. You’ll also be able to claim back any VAT you pay on supplies. You can also register for VAT if your turnover is lower than the threshold, but it means you’ll need to charge extra to your customers. The main benefit is that once you are VAT registered, you won’t have to pay VAT on business expenses and can claim it back.
You can register through the Government Gateway HMRC website at gov.uk. You’ll need a National Insurance number or your tax identifier, details of your business and business bank account details.
It doesn’t cost anything to register, but you must do so as soon as your revenue is higher than the VAT threshold for a 12 month period. Once you’re registered, you just need to add the VAT on the invoices you issue.
You usually need to submit a VAT return every 3 months. The exact payment deadline will depend on your accounting period and when you first registered for VAT. On your VAT return you’ll need to include the details of your total sell and purchasing amounts, as well as the amount of VAT you owe. You’ll also need to include whether you want to reclaim a VAT refund.
It’s essential to keep a record of all your VAT transactions, and you must complete your return online if you are using standard VAT accounting - which is what most businesses follow. You’ll see the deadline on your VAT return, and you must pay on time. If you make late payments you may get hit with surcharges from HM Revenue.
You can claim VAT back if you’ve purchased goods or services abroad or a customer leaves you with bad debt. Completing and paying a VAT return doesn’t have to be complicated. Many invoicing software companies allow you to add VAT onto invoices and make it easy to create a return with just a click.
Making Tax Digital is the government’s online service to make tax payments simple, and the HMRC have made it pretty straightforward to pay VAT. You can usually choose to pay with direct debit (BACS/CHAPS), and the payment will be taken automatically from your account 3 days before your deadline - usually on the 10th of every month. The Government Gateway website will walk you through the steps to set up your VAT online account.
This is the most efficient and easiest way to pay your bill: it’s automatic, which helps reduce stress as well as time. However, you can also pick a manual payment method and pay by credit card, standing order or through telephone banking (faster payments) if you prefer.
If your turnover is higher than £85,000, then you’ll need to register for VAT whether you like it or not. So you’ll need to factor how you charge VAT into your cash flow management and cash accounting.
Are there any benefits to registering for VAT if you’re turnover is under the threshold? The main drawback is that you will need to charge your customers 20% more if they are not VAT registered, which could lead them to buy from a competitor.
But there are some benefits! Here are a few of them:
If you are a B2B company, having a VAT registration number adds some authority to your business. It means that you are registered with the local authority and have a legitimate company.
Some customers and businesses prefer doing business only with VAT registered companies. You’ll also appear to be a larger company since your revenue must be somewhat high.
Another benefit is that you can then claim back business expenses if you’ve paid VAT on them. Once you submit your return, you can claim repayments on any expenses where you had to pay VAT yourself.
That’s why it’s important to keep VAT records of everything you pay for: when it comes to paying your VAT, you’ll be able to deduct some of your expenses. You can also claim back expenses that you paid VAT for before you registered, although it’s best to talk to an accountant to help with the admin.
Registering and paying for VAT will encourage you to keep your accounting system up to date and will make it easier to manage expenses and pay corporation tax when the deadline comes around. If you’re planning on growing the business, then registering for VAT sooner will help you get a headstart on the accounts management.
In general, it’s best to register for VAT only once you reach the threshold - but it’s well worth considering if your business only deals with VAT registered businesses or needs to appear more legitimate.
Although it can seem complicated at first glance, it’s easy to set up your invoicing software to do all the heavy lifting for you. Make sure to set up your VAT payments with direct debit and you won’t have to worry about calculating the VAT due!
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