Owning a business comes with all kinds of complications and responsibilities, such as being accountable for a number of financial and legal obligations. With that being said, tax can be a very daunting topic and one that not everyone fully understands.
Many of us are familiar with the term ‘VAT’ but when it comes to understanding the legalities behind the system, more often than not it goes over our heads. It is vital to know that once your annual turnover exceeds that set by HMRC, then going VAT registered is a mandatory requirement, no matter how big or small your business is.
What is VAT?
Simply put, VAT stands for ‘value added tax’ and it is a tax charged by businesses when they supply goods and services within the United Kingdom or Isle of Man. At present the VAT rates for goods and services are as follows:
Standard rate 20% on most supplies of goods and services / Reduced rate 5% on supplies of fuel and power in the home and also one some property conversions / Zero rate 0% examples include most food (but not restaurant meals, cafe meals or take-away food and drink). Books, newspapers, young children’s clothing and shoes are also at the zero rate.
When should you become VAT registered?
You are not obliged to become VAT registered until your annual total of taxable supplies exceeds the registration limit of £82,000. To check the most up to date limit, visit the HMRC website. If you exceed the registration limit, then you must register at the end of that month where you exceed the limit. The main change you will have to accommodate for once you reach this level is to ensure that you apply VAT to your goods and services, which means an increase of 20% on your prices. Once you have collected this additional 20% it will be paid to HMRC.
One thing to remember is that once you become a VAT registered business, you will be able to reclaim VAT on any purchases you have made to other VAT registered businesses.
How to register
When exceeding the tax threshold, you will need to complete a form either online or send via post to the VAT office whom will process your application. Once you receive your certificate from them with your full registration details, it will then be compulsory for you to file your VAT returns online and pay your VAT electronically.
You would usually expect to file a VAT return every three months, however you can request to receive monthly or annual VAT returns.
As a business owner, you are accountable for making sure that your VAT returns are filed and to ensure any VAT payments owed are paid. Whilst it may seem overwhelming, speaking to a financial professional will give you the reassurance you need to confidently undertake this task.
Do you have any advice for other business owners who are nearing the threshold to become VAT registered? Leave a comment below, we’d love to hear from you!