21 June 2021
VAT is something that we’re probably all aware of, but how many of us really understand the ins and outs of it? As an SME founder, understanding the relationship between VAT and your business is important to ensure you’re saving as much money as possible and fulfilling your legal obligations. You’d be forgiven for feeling overwhelmed by all the information out there around VAT, so we’ve broken down some of the top questions we get to help you out.
Plenty of small businesses find a way of doing their own tax returns, but there’s a popular book called Very Awkward Tax (by Emily Coltman) for a reason. It comes down to how much you value your time and effort. If you’re a small, one man band operation, then it might be straightforward enough, but as you start to grow you should consider thinking more like a big business and outsourcing your VAT returns to an expert.
Between the different schemes, complicated rules, and the ever changing regulation, having an expert on your side will really make a difference. As well as saving you time and stress, it could also save you money in the long run and help you avoid making mistakes with harsh consequences.
The threshold for registering for VAT is £85,000. This means if your turnover exceeds this in the last 12 months, then you are legally required to register for VAT. However, you can voluntarily register for VAT if your turnover is less than this.
There are two reasons to consider registering for VAT voluntarily. Firstly, it could end up saving you money. If your input tax (tax that you pay) is higher than your output tax (tax that customers pay you) then you can claim the difference from HMRC. You can even claim back VAT on some purchases you made before you registered your business. The second benefit is the tone that it sets going forward. We’re big fans of SMEs thinking like big businesses. It’s the foundation that you need to grow, in both a quick and robust way.
The downside is there is some extra admin involved, and it’s very important to keep records accurate and up to date. But that’s where your tax experts come in. Making FD Works your tax agent, means we can represent you when it comes to all things tax, and your worries around ‘Very Awkward Tax’ will be a thing of the past.
There are several different VAT schemes – the right one for your business will depend on a number of factors.
By far the most common scheme we advise businesses to use is the flat rate scheme. The purpose of the flat rate scheme is to make things simple for small businesses. It can often end up saving you the most money, but this is very dependent on the type of business you have. It may be more suitable for you to be on a cash scheme (where you pay tax based on when you receive payment from customers) or an accrual scheme (where you pay tax based on the date you invoice customers).
Working with an accountant who’s your tax agent has some real advantage here. Your accountant can review your accounts, do the calculations and advise you if you’re still on the right scheme. If you’re not, they can help you to move to a more profitable scheme.
If you file your VAT return monthly or quarterly, then your VAT return is due 1 month and 7 days after the reporting period ends. If you do annual returns then it is due 2 months after the reporting period ends. Payment must be cleared by these deadlines too, so it’s good to plan a little bit ahead to ensure you have the cashflow you need at the right time.
The short answer? Any goods or services for use in or on your business. The detailed answer is more complicated. For example, hot food and bottled water are coded with the standard VAT rate, whereas cold food taken away is zero rated. Entertainment expenses for employees can be claimed back, but any entertainment for clients or contractors can’t be. And what about services like broadband that you have for personal use too? That’s where you get to claim back a proportion of your VAT.
This is just one of the tricky things about trying to understand VAT, and another very good reason to consider outsourcing your VAT needs.
If you still have questions, head over to the VAT page in our help centre. If you’re still confused (who would blame you) or think we can help you out, give us a call on 01454 300 999, or drop an email to email@example.com.
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