Do I Need to Pay VAT?
Does your small business need to register for VAT? No company particularly wants to pay VAT, and it’s a complex tax to get your head around, especially if you are a sole trader or a self-employed small business owner.
Here the team at Neil Smith Accountancy breaks down the rules for Essex businesses.
What is VAT?
Value Added Tax is a sales tax you’re required to pay on goods or services sold to customers. It’s usually charged at 20% though there are some exemptions.
For example, if you sell children’s clothes you don’t add on VAT. Other goods and services have a lower tax – for household fuel such as gas, it’s 5%. You can find a full list of VAT exemptions here.
VAT levels can change sometimes depending on the political and economic climate. For example, during the pandemic, there was a temporary reduction in the rate for the hospitality and tourism industries.
VAT is not charged on profits but on turnover. If your taxable income is over a certain threshold, then you need to register for VAT with HMRC. This applies equally whether you are self-employed or a limited company.
Register for VAT When Above the Threshold
You do not need to start paying VAT until your sales are over the set threshold. At the moment, this is £85,000 and it has been frozen at this level for at least the next two years.
If your turnover goes above the threshold in any 12 months, then you will need to register for VAT with HMRC. Failure to do so can lead to a substantial fine.
You need to calculate your monthly sales and keep a running total for the next 12 months if you are close to the threshold.
If during this time, your sales exceed the threshold then you have about 30 days to contact HMRC and register for VAT. For example, if you reached that threshold on 31st August, you will then need to inform HMRC by 30th September. You will then have to start adding VAT to your invoices from 1st October.
If, however, you think that you are going to go over the threshold in one particular month, you will need to register with HMRC immediately.
Voluntary VAT Registration and Potential Benefits
You may decide to register for VAT even though you are not likely to reach the threshold. This is known as voluntary VAT registration. Why would you do this? Well, if you are not registered for VAT, you cannot claim back VAT on items that you purchase from suppliers and other services. You can, however, if you are registered.
Voluntary registration may benefit your small business, as VAT paid on costs can be offset against the VAT payable for your company’s services.
*VAT is applied at different rates depending on the goods/services, not all costs will include VAT at the standard rate or at all
You may even receive repayments if your VATable costs are greater than the VAT paid to you on sales.
There are other benefits for your business to VAT registration. Being a limited company with VAT registration can ensure potential customers, clients, creditors and others see that your organisation is professional and serious. As the threshold is £85,000, you’ll also look like a bigger fish in the pond.
As always, speaking to an accountant when you have business-specific questions about your taxes is a good idea. If you don’t yet have a small business accountant, Neil Smith Accountancy can help.
When Do I Need to Pay VAT?
If you are over the threshold and need to pay VAT, then you can register with HMRC online. It’s relatively simple to do and takes just a few minutes.
Once registered, you will need to complete VAT returns every quarter. These must be submitted to HMRC within one month and seven days of the quarter and payment has to be made at the same time.
It should also be noted that VAT has now gone digital which means you should submit your return using specialist accounting software. You can find out more here.
Managing VAT and keeping on top of it can be a challenge for businesses of all sizes. The accounting software currently available does make it easier, and can remind you when returns need to be presented to HMRC.
At Neil Smith Accountancy, we’ve supported many businesses in the Essex region over the years and that includes helping them to manage their VAT returns. If you’d like to see how we can help, contact our expert team today.
