Navigating the Financial Waters
VAT: Who, What, When, Where, Why?
VAT registration is a major milestone for any business.
We've prepared the basics below to help you think about your options.
VAT is a tax applied to most goods and services sold in the UK. The main rate of VAT in the UK is 20%, although some items have a rate of 5% and others 0%.
Businesses in the UK can register at any time but this becomes mandatory once your turnover reaches £90,000 or above, over a rolling 12 month period.
What is a 12 month rolling period? Once you start getting close to the threshold, you need to start tracking your sales. A rolling period is the consecutive 12 month period before a certain point. So if we checked today (31st of August), we would look at our sales for the previous 12 months (September 2023 to August 2024). If you're still under the threshold, you would have to do the same test next month (October 2023 to September 24) and so on.
I'm ready for VAT registration, now what? You need to make a few decisions.
The first decision is what scheme do you want to be on?
The second decision is how to manage your cash flow?
The third decision is how you're going to report your VAT to HMRC?
First decision
What scheme do you want to be on?
Standard VAT
This scheme involves reporting the VAT on your income and expenses at the invoice date, whether or not the invoice/receipt has been paid.
No turnover threshold.
Ideal for most/businesses with long credit terms with suppliers.
Cash Accounting
Exactly the same as the standard scheme, but you report the VAT on your income and expenses at the date they are paid.
Turnover threshold is £1.35mil.
Ideal for businesses who don't tend to have payment terms with suppliers.
Flat Rate Scheme
You charge your customers VAT at 20% but HMRC charge you a lower flat rate % on your sales including VAT. You can only claim VAT on assets above £2,000.
Turnover threshold when joining is less than £150,000 and you must leave when it goes above £230,000.
Ideal for businesses who don't have a lot of claimable VAT.
Marginal Scheme
This scheme involves paying VAT on the profits made from selling second hand items you have purchased with no VAT. So if you made £500 profit, you'll pay 16.67% VAT on that amount. You can still claim VAT on expenses.
No turnover threshold.
Ideal for businesses dealing in second hand items (cars, old furniture etc.)
Annual Accounting
Instead of completing a monthly or quarterly return, you send one annual VAT return to HMRC. You make 3 advance payments based on your last annual VAT return and make a final payment/refund.
Turnover threshold is £1.35mil.
Ideal for businesses who don't have a lot of vatable expenses.
Retail Scheme
This scheme is more complex than the other schemes and there are 3 types of retail schemes avalible. We recommend speaking with us before deciding to use this scheme.
No turnover threshold.
Ideal for businesses with high volumes of sales (for example a busy corner shop).
There are a few steps to ensuring you're going to have enough money to pay your VAT bill at the end of the month, but that's not the only factor to consider. We find the main worry for businesses going VAT registered is making the decision to absorb the cost, or put prices up.
If your customers are mostly other businesses (B2B), they're most likely VAT registered and can claim back the increase in price through their VAT returns.
If your customers are mostly consumers (B2C), they won't be able to claim back the VAT and a price increase may become an issue. In this case we recommend a few steps to ease any stresses on cash flow:
- Speak to your customers, there may be some that won't mind the increase if they're happy with your product.
- Gradually increase the prices, chances are your competitors are doing the same.
- Check what product you're selling, you could have a product that is eligible for a reduced VAT rate.
- Get the correct VAT scheme, being on the wrong scheme can cost you a lot of money.
Our top tips for managing your cash flow and keeping on top of your upcoming VAT payment are the following:
- If you cash balance allows it, put your sales VAT into a separate bank account. This way you will have surplus cash when it's time to pay.
- Update your software regularly and monitor your VAT position. Most modern software will tell you exactly where you're at.
- Try to use VAT registered suppliers. If they're 10% more expensive but you're claiming back 20% of VAT, you'll be better off.
Second decision
How to manage your cash flow?
Third Decision
How to report your VAT to HMRC?
In our previous article, Making Tax Digital (MTD), we spoke about HMRC requiring businesses to report their earnings via software. When you're VAT registered, you need to report your VAT returns using MTD compatible software.
Choosing the right software will ultimately save your business time and ensure you're not overpaying VAT. To achieve this, we highly recommend Xero, combined with Hubdoc.
Xero allows your bank to be integrated directly with the software and Hubdoc allows you to take photos of receipts and invoices with your phone, to send to Xero. These two softwares then work together to match your bank transactions with your invoices.
Although there is a cost involved, we wouldn't offer these packages if we didn't believe our clients would save money through the time saved and accuracy of their VAT returns.
Packages start from as low as £15 per month, speak to us before making a decision so we can get you on the correct package.
We work with all of our clients, providing expert VAT advice when they need it.
For a free VAT consultation, contact us!
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