The value in VAT
It may be worth registering for value-added tax, even if you don’t have to
More small businesses with relatively low annual sales will soon be beyond the reach of the value-added tax (VAT) system. Chancellor Jeremy Hunt has announced the first increase in the VAT threshold, the level of sales at which businesses must charge VAT, for seven years. From 1 April, firms will not have to register for VAT unless their annual turnover over the previous 12 months has exceeded £90,000, up from £85,000 today. Such businesses can avoid the administrative burdens of the VAT system and will be able to keep prices lower for customers, since they don’t have to add the 20% VAT charge to their prices. However, even if your business is below the threshold, you still have the option of registering for VAT. Many small firms choose to do so, because there are advantages to being inside the system as well as downsides.
Gaining credibility
Most importantly, once you’re inside the VAT system, you’ll be entitled to reclaim the VAT you pay when your company buys products and services, by setting the cost against the VAT revenue you’re due to hand over to HM Revenue & Customs. In periods when the VAT your business has paid out exceeds the VAT it has charged on its sales, you’ll even be entitled to a payment from HMRC. Another plus point is that being VAT-registered can give your business credibility. Some companies will only transact with firms that are inside the VAT system. Furthermore, for many businesses, the supposed benefit of being able to offer lower prices by charging no VAT is illusory. If most of your customers are themselves VAT-registered – because you sell mostly to other businesses rather than consumers, say – they’ll be able to reclaim the tax charge on your invoices.
The challenge with VAT, particularly when you first register, is to set up foolproof accounting systems that make keeping track of your account more straightforward. Crucially, you need to keep detailed records of all the VAT charges you have added to customers’ bills, as well as the VAT your firm has paid when spending money.
This is the information you will need to declare when making VAT returns to HMRC, which must now be submitted digitally. Most businesses make quarterly returns, with the VAT they owe then due one month and seven days after the filing deadline. If you’re due to file your next VAT return on 31 May, say, the tax you owe will need to be paid by 7 July. You do have some options for managing your VAT account in the most convenient and cost-effective manner. For example, as long as your firm’s annual turnover does not exceed £1.35m, you may file an annual VAT return, rather than having to complete quarterly ones. You’ll still pay VAT to HMRC quarterly – potentially with an adjustment each year when your final return provides an up-to-date statement of your account – but this can reduce your paperwork.
The cash accounting scheme also suits certain businesses. With this arrangement – again open to those with annual sales of up to £1.35m – you account for VAT based on the date your customers pay you, rather than when you send your invoices, as is the normal arrangement. This can work well for firms whose customers are slow to settle invoices. They won’t be on the hook to pay HMRC before they’ve received their money. Finally, the flat-rate scheme can work out very well for certain businesses, though you must have an annual turnover of less than £150,000 to be eligible. In this scheme, rather than keeping track of your spending so that you can claim refunds of your VAT costs, you hand over VAT to HMRC at a lower rate than you’re charging. Assuming your customers pay 20% VAT on your invoices, say, you might only have to pay 16% to HMRC – the difference is supposed to cover your company’s VAT
costs, with no need for you to account for them. In this scheme, different flat rates apply depending on which industry or sector your business operates in; you’ll need to check this with HMRC. But the flat-rate scheme can deliver a financial benefit for some businesses.