VAT basics explained

VAT basics explained

4 min read

As a small business owner, one of the first taxes you’re likely to come across is VAT. It’s a tax that can cause some confusion, so it’s useful to have the VAT basics explained. Although VAT is generally straightforward, there are some tricky areas, so do take advice from an accountant.

Does VAT apply to me?

VAT applies to you as soon as your sales of VAT-taxable goods and services exceeds £85,000 (the VAT threshold). This is true whether you’re selling goods or services, and whether you’re trading as a limited company or sole trader.

If you reach this threshold in a 12-month period, or know you’ll reach it, you have to register for VAT. Note that you can register voluntarily below this limit, and generally you should register if most of your customers are themselves VAT-registered.

You can only charge VAT if your business is registered for VAT.

How VAT works in practice

When your business is registered for VAT, you effectively become a tax collector for HMRC. You have to charge VAT on sales (known as outputs), and you can reclaim VAT incurred on expenses (known as inputs). You then need to pay HMRC the difference between the VAT collected on sales and the VAT incurred on purchases, usually on a quarterly basis.

The issue for you as a small business is making sure you understand that money collected on behalf of the government doesn’t belong to you – you shouldn’t use this cash to fund the business. HMRC is very unsympathetic when VAT isn’t paid on time, so consider opening a separate bank account to transfer an estimate of the VAT due to help stop you spending it.

How to register for VAT

You should register online with HMRC. You’ll be able to create a VAT online account (also known as a “Government Gateway account”) which you’ll need to submit your VAT Returns to HMRC.

You could appoint an accountant (or agent) to submit your VAT returns and deal with HMRC on your behalf. You’ll have to pay for this service but it’ll save you a lot of time and administration.

Making Tax Digital (MTD) – get online now

In April 2019 the new Making Tax Digital (MTD) regulations will come into force. Under MTD all VAT registered businesses will need to submit their VAT return online and record all VAT transactions digitally. So it makes sense to register online as soon as possible.

How can I make this easier?

Registering for VAT could mean more administration for you, so it pays to get organised from the start and be ready for MTD in April 2019.

Quarterly returns: You’ll save so much time using accounting software for your quarterly returns rather than trying to work out your VAT on Excel. Make sure you choose software that is MTD compatible such as QuickBooks Online.

Inspections: You’re pretty likely to get a VAT inspection at some point. It’ll be much easier for you if all your records are on one accounting package (and remember you need to keep your supporting invoices for at least six years).

Pre-registration expenses: There’s some scope to reclaim VAT on goods and services your business bought before registering for VAT. You’ll only be able to do this if you have the VAT invoice.

Invoicing: Your invoices will need to contain the right information in order to be deemed VAT invoices. If you use accounting software to handle your invoicing you won’t need to worry about this.

Where can I get more help?

HMRC are genuinely very helpful with comprehensive VAT guides for businesses.

They also have a dedicated telephone helpline.

Definitely talk to an accountant if it’s your first time administering VAT. Most businesses are straightforward but there may be some tricky issues you’re unaware of. You can find an accountant near you here.

Did you find this article explaining the basics of VAT? The QuickBooks Blog covers many more topics. It’s all part of the support we offer to small businesses in the UK.

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