Each time the finance minister is seen holding that famous red briefcase, the general public goes a little mad. Why? Well, we almost never expect good things to happen when a budget or tax announcement is due.
The majority of us despise the word ‘taxes’ so strongly, that if it was up to us, we would permanently delete it from the dictionary – and of course, our lives.
At Northants Accounting, we understand just how much people hate the idea of paying taxes and whilst of course a lot of good stems from it, it doesn’t make parting with our hard-earned cash each and every month any easier, that’s for sure.
During our time working with small businesses, we have often found that certain parts of the job are difficult. One of the hardest parts about being a small business accountant is steering business owners away from the idea that VAT registration makes selling extra difficult.
Value Added Tax (VAT) is sometimes a murky area for business owners and it is something that I get asked about a lot as a small business accountant working with SMEs.
One of the most common questions I get asked is whether registering for VAT will affect a company’s sales. So, it made sense to address this frequently asked enquiry in a blog and I’m hoping that I will be able to clear a few things up in the minds of confused small business owners.
What You Need to Know About VAT
VAT is a type of sales tax which is levied by the government against goods and services within the UK. Only businesses can be registered for VAT, meaning consumers themselves cannot. So, in simple terms, VAT is tax on the sale of the majority of goods and services businesses provide.
But not all businesses have to actually register for VAT. There is a set limit that HMRC have outlined, and if your small business has vatable sales that are below this limit, you don’t have to register.
Currently, registering for VAT is mandatory only for those UK based companies which have a turnover of £85,000 or more per year.
The current rates for VAT are as follows:
- Standard rate – 20%
- Reduced rate – 5%
- Zero rate – 0%
Usually, the standard rate of VAT will be applied to most services and goods sold. There are some businesses that will only need to pay a reduced rate of VAT, such as those who sell home energy and children’s car seats. There are also some goods and services out there that are deemed ‘zero-rated goods’, such as children’s clothes and most food.
Even if your company’s turnover is lower than the VAT threshold, it is still possible to register your business for VAT. There are several benefits of doing so voluntarily, and we have included them below.
The Benefits of Registering for VAT
The moment you hear the word VAT, you might think of it as a source of inconvenience. After all, keeping records, filling out forms and filing returns is not exactly what any of us deem as fun, let alone a good use of company time.
However, if you look beyond the perhaps monotonous admin involved, there is plenty of good that comes from registering your business for VAT.
Looking for Accountancy & Tax Services?GET IN TOUCH
Enhance Your Company Image
Most of us are aware of the VAT threshold. The instant we see a VAT registration number, we identify the business as one whose turnover has surpassed the £85k threshold. This added credibility can only be a good thing for your growing business.
Start-ups and small businesses often have the hunger required to achieve record growth. They are eager to become more visible and stand apart in a highly congested and competitive industry.
As a result, small business owners focus on trying to get their company out there and a big part of being successful is appearing successful. After all, perception is key and unsurprisingly, registering for VAT can give business owners the opportunity to bolster the image of their brand.
Being VAT registered sends a message across to potential clients and customers that your business is doing well. It gives them the impression that your business is generating a turnover of at least £85k and that it is in a strong position.
It goes without saying that no one wants to get involved with a brand that is about to “go under” and therefore appearing as a business that is succeeding is vital, especially when it comes to selling.
Equally, not being registered for VAT will mean that your clients and customers will no doubt be aware that your business does not exceed that £85k threshold.
So, it might be worth considering registration as it is likely to give you an edge over your competitors that have not yet taken the time to register for VAT.
It Might Reveal New Business Avenues
Certain businesses are very particular about the companies that they deal with. And as a business owner, sometimes you will find there are companies and also individuals out there who believe that companies which are not VAT registered are somehow less credible – and it is even possible that they may refuse to work with your small business.
Whilst this might not seem fair, it is best to take this sort of attitude on board – registering for VAT will prove to be useful for your business network as you will be able to provide proper VAT invoices that these sorts of businesses will be happy with.
There are some things that words simply cannot describe at times, and one of those instances is getting money back from HMRC!
Once you have made a VAT return, HMRC will usually make a repayment within 30 days of receiving it. The money goes straight into your bank account, providing they have your bank details on record and if not, you get a lovely cheque in the post, referred to as a ‘payable order’.
But of course, you are only in reception of this if your company is VAT registered. So, if your company has purchased a lot of goods and paid VAT on all of them, you can send off your VAT returns and be rewarded for it.
Businesses which have invested in plants, machinery, equipment or IT may be able to reclaim larger amounts of VAT too.
The majority of businesses that are registered are entitled to make VAT reclaims – providing that the expenses are subject to VAT of course.
Whilst the rules differ depending on what country you’re in, generally speaking, the UK recognises the below expenses as VAT deductible:
- Hotel accommodation
- Meal expenses
- Car rentals and fuel
- Business conferences, trade shows, intercompany seminars and travel delegations
- Logistics and import VAT
- Professional fees
- Marketing expenses
- Installations, drop shipping and maintenance contracts
Ensure that you keep all important documents in a safe place, such as receipts, so that your chances of VAT recovery are as high as possible.
Additionally, to make the process easier, you can utilise VAT claim management software that essentially automates your VAT recovery.
If you’re still a little unsure, get in contact with your small business accountant, as they can guide you through the process to ensure your business jumps through all the necessary hoops to get the VAT refund.
Not Worrying about the VAT Threshold
Let’s just say that your business is booming. Now, seeing your company grow is an incomparable feeling and you’re doing what every triumphant business owner does in this situation – popping open a bottle of champagne.
But just when the lid is off, you get an angry letter from the taxman. As it turns out, your company just crossed the £85k threshold and you completely forgot about registering your business for VAT.
When you voluntarily register for VAT, you don’t have to worry about accidentally crossing the threshold and having to pay penalties. Your business thriving more than ever will not arrive alongside the need to pay penalties and lots of admin, as your business will already be well equipped at handling VAT related tasks.
You get to pat yourself on the back for being far sighted and being a step ahead of the game at all times. And isn’t that a leading trait found in any successful business owner?
VAT Registration Number
Think of the VAT registration number as the medal that you wear on your chest, except that this one just doesn’t go on your chest but also on your invoices.
It will make your customers feel confident that they are dealing with a business that passes the £85k threshold and this image can go a long way in helping your company reach the pinnacles of success that you’ve been striving for all these years.
So, as you can now see, VAT registration is not something that will stand in the way of selling when it comes to running your business. With so many feathers in your hat, selling is likely to get a whole lot easier after VAT registration.
Don’t worry about the ‘negatives’ involved with VAT registration, such as the increased paperwork that is part and parcel of signing your business up to register.
Yes, there is a fair amount of paperwork involved, including a quarterly VAT return. But there is accounting software out there that incorporates your VAT payments into your existing reports and bookkeeping, which makes the process a lot easier.
And of course, that is why any business, regardless of size, should be working alongside an experienced small business accountant. Leave the complicated paperwork to the professionals so that you can focus on delivering the high-quality service or product that got your business on the map in the first place.
For more information on business accounting, get in touch with our friendly team today to arrange your free consultation.
Download our free eBook
Download our free Limited Company Tax & Finances eBook for free insights into modern business accountancy.GET IN TOUCH