Value Added Tax or VAT is a tax which affects businesses with an annual turnover of £85,000 and over. At this threshold, companies are required to register for VAT and make regular payments to HMRC. There are businesses who don’t hit this threshold but still choose to voluntarily register for VAT. It may seem counterproductive to register for a tax when you don’t have to, but there can be potential advantages to this.
What is VAT?
VAT is a tax applied to the majority of products and services within the UK- with the standard rate set at 20%. It differs from other types of taxation in that it is applied cumulatively along the supply chain, from the first supplier to the consumer. VAT is applied at each stage at which the product has had value added- hence Value Added Tax.
As this tax applied multiple times throughout the supply chain, it would be easy for an individual or company to be overcharged; however, this is taken into account. For example, if a company purchases wood and uses this wood to make furniture to sell to customers, both the VAT they paid on the wood and the VAT they received from the customer is factored in. Therefore, the final amount that they pay to HMRC is the difference between the two, ensuring you don’t pay more or less than your fair share.
Just as with other forms of tax, you can register for VAT both online or via post, by completing the VAT1 form. As already mentioned, businesses who have a taxable turnover of over £85,000 are obliged to register for VAT. If you realise that you are going to pass this threshold in the next 30-day period, you must register within this monthly period. If you believe that your business is only temporarily passing the threshold and therefore feel like you shouldn’t have to register, then you can contact HMRC directly, and they may grant you an exception.
Many businesses won’t meet the threshold for VAT and therefore don’t have to apply, however, this means that they can’t charge VAT on their supplies or claim it back from expenses. It is, however, worth noting, that you can claim tax relief on the full cost of your expenses, inclusive of VAT.
When it comes to making your VAT payments, most businesses complete VAT returns quarterly. The return should be completed within one month and seven days from the end of the relevant period and the payment is due at the same time. In recent years, HMRC has introduced a “Making Tax Digital” scheme, moving the majority of returns online. However, if you would prefer paper returns, you can contact them and request this format.
Whereas standard VAT returns are usually the difference between the tax received from customers and the tax paid on supplies, there is an alternative in the form of the Flat Rate Scheme. Using the Flat Rate Scheme, businesses pay a fixed rate to HMRC.
Some businesses will voluntarily register for VAT, even when they haven’t met the £85,000 cut-off point. This is because there are some potential savings which can be made with this approach, particularly for smaller businesses. When voluntarily registering for VAT, smaller companies will tend to opt for the Flat Rate Scheme. Under this scheme, you pay a flat rate of VAT, and in some cases, this is lower than the standard rate of 20%. Therefore, there are scenarios where a company will be able to keep some of the VAT they have applied to their goods and services. Whilst this money is designed to be compensation for the VAT applied to supplies, many smaller businesses aren’t burdened with high input costs, and therefore they can pocket the left-over VAT.
Voluntarily registration may seem like the perfect idea, but there are many downsides to consider. The main drawback is that the savings are often relatively small and may not be worth the effort of being VAT registered. This is particularly noteworthy when you consider the responsibilities that come with being registered- keeping accurate records, regularly making payments and the possibility of penalties if you miss a deadline.
Whether voluntary registration is right for you and your business will depend on your specific circumstances, but it’s not a decision that should be taken lightly. At Salhan Accountants, we can, of course, give you advice on the best approach for your business.