If you’re new to owning a business and have recently got into the minefield of VAT, we know it can be confusing to get your head around.
That said, if you can take the time to understand how to properly navigate it, it can feed directly into your business’s wider financial strategy almost seamlessly. Not everything is as bad as it seems on paper, and VAT is one of those things. There are many options available for making your payments more affordable and seamless.
So, what are the key points you need to understand first?
In the UK, if your business’s taxable turnover exceeds the current taxable threshold of £85,000, you need to register for VAT. The threshold relates to a rolling 12-month period, not your financial current year.
Even if you’re under the threshold, voluntary registration is possible should you want to explore the benefits of various tax credits.
What benefits are there to my business being VAT registered?
Reclaiming VAT on purchases
Once registered, a business can reclaim the VAT paid on any business-related purchases. You would need to submit a tax return to HMRC every 3 months to claim this.
Enhancing your business profile
If your business does a lot of work with other businesses, being your registration could arguably give you a more professional image.
Exploring the VAT Flat Rate Scheme
The amount of VAT you usually pay or claim back from HMRC is the difference between:
- The VAT charged by business to customers and
- The tax amount the business pays on their own purchases.
Instead, with the Flat Rate Scheme:
- You pay a fixed rate to HMRC
- You keep the difference between what you charge your customers and pay to HMRC
- That said, you can’t reclaim on your purchases, except for certain capital assets valuing over £2000
To be eligible for the Flat Rate Scheme your VAT turnover must be less than £150,000 (exc. tax)
The Flat Rate Scheme allows small businesses to more accurately budget as you know exactly what your liability is going to be each time. The rate will vary depending on the nature of your business, but it remains stable and makes for more predictable forecasting.
The scheme also reduces time spent on accounting and paperwork.
That said, it doesn’t mean the Flat Rate Scheme is the right solution for you. For example, if you incur a high amount of VAT on purchases, the traditional payment method may allow to reclaim more money than what you would save on the Flat Rate.
What are the issues for a small business?
It goes without saying that VAT can be time-consuming and complicated, and any discrepancies with HMRC can come with costly fines. You need to ensure you keep your finger on the pulse with what rate you should be charging and whether your turnover is exceeding the threshold to register.
Delaying registration, charging the wrong rates or missing returns and payment deadlines can all result in penalties.
As best practice, it’s good to invest in an accounting professional or software to help keep accurate records and ensure you’re covering all legal requirements. A robust accounting software is also great for storing invoices, receipts and financial documents to ensure accurate records and storage requirements (legally, you must keep all these documents for at least six years).
Moorgate Finance can support you with your VAT liabilities and help you to explore options for making payments more affordable, such as through VAT and Corporation Tax Funding. For more information, call us on 01908 92 62 62 or hit the ‘APPLY NOW’ button on our website.