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vat small business pointers

VAT - What every small business should know







  • When do you register for VAT?

    Your business must register for VAT with HM Revenue and Customs (HMRC) if, over the past 12 months, your “taxable supplies” (closely based on your sales or turnover, not your profit) have exceeded the VAT registration threshold. This applies to all commercial businesses, whether you’re operating as a sole trader, partnership, limited company or another business structure.


    The VAT registration threshold is currently £85,000, although it tends to increase each year in April. It’s calculated on a rolling basis, so you’ll need to monitor your taxable turnover for a rolling 12 month period, not just in the current tax year, your last financial year or the calendar year. If, at the end of any given month, the total of your turnover over the last 12 months exceeds £85,000, you’ll need to register for VAT.


    You should also register if your turnover is likely to exceed £85,000 in the next 30 days.


    You may even want to register voluntarily if you make significant VAT inclusive purchases and sell mainly to VAT registered customers.


    From April 2019 businesses with turnover above the VAT threshold will be required to keep accounting records digitally and file their VAT returns to HMRC through MTD software. If you are unsure if your business will need to comply from April 2019 we can advise you.

    >>> See Making Tax Digital for VAT <<<


  • How will your customers be affected?

    Bear in mind that if many of your customers are consumers, then any VAT registration means putting up your prices straightaway, or absorbing the VAT charge yourself – a very difficult decision that many businesses have to face at this time.  However, if most of your customers are VAT registered businesses or if your goods are zero rated, then registering for VAT should not adversely affect your customers, and you can reclaim the VAT that you have suffered.


    So, in answer to the question should I register or not?


    • If you sell mainly to non-VAT registered businesses/people, then perhaps not.
    • If you sell mainly to VAT registered businesses then you probably should.


    Remember that if your turnover gets high enough then you’ll be legally obliged to register.

  • A worked example - selling to the public or unregistered businesses

    Imagine you sell widgets to people or businesses that aren’t VAT registered (ie, the public). You currently buy them for £7 (including VAT of £1.17) and sell them for £10.


    You currently make a profit of £3 on each sale. If you become VAT registered then you can claim that £1.17 back and now you’re making a profit of £4.17 per sale.


    But you’re now VAT registered and you have to charge VAT on everything you sell. If you add VAT to your current selling price of £10, then you’ll be selling at £12. If your customers are VAT registered they won't care as they can claim back the VAT. But if they’re not then the extra £2 has to come out of their pocket.


    So essentially your prices are now higher and may mean you customers go to the other widget shop that is now cheaper than you.


    You could absorb the VAT – i.e. still sell at £10, but have that as the VAT inclusive price (£8.33 + £1.67 VAT).


    So lets look at your profit again.


    You buy your widgets at £5.83 (you actually pay £7, but £1.17 can be claimed back)

    You sell them at £8.33 (you actually charge £10, but £1.67 goes to HMRC)

    So, you now make £2.50 (£8.33 minus £5.83) profit on each sale.


  • What are the main VAT schemes available?

    If you do decide to register for VAT, you should be aware that there are a number of schemes available. These are the 3 most popular.


    Standard Scheme

    On the standard scheme, the amount of VAT you owe (or reclaim) is based on the date of invoices. So if you invoice someone for £1,000 + VAT – that VAT is deemed to be owed to HMRC at the end of the quarter in which you dated the invoice. This can cause cashflow problems for small business.


    Cash Accounting Scheme

    This solves the cashflow problems associated with the Standard scheme. VAT is deemed to be owed at the end of the quarter in which you were actually paid for the invoice (and on the other side – when you paid for your purchases)


    Flat Rate Scheme (FRS)

    This scheme can save you a lot of money in certain industries. You get given a flat-percentage rate dependent on the industry you are in. Lets assume 11%. You then charge VAT at the usual rate but you only pay over to HMRC 11% of your Gross (meaning inclusive of VAT) turnover. You can’t claim back any VAT on your purchases (with a few exceptions), but you don’t hand over all of the VAT you receive to HMRC.


    Changes were announced in the 2016 Autumn Statement to the amount of VAT that many small businesses will have to pay.  This will affect businesses that use the VAT Flat Rate Scheme but which spend very little on raw materials - such as firms providing services.


    How does it work? - Normally a business deducts the VAT on its inputs from the VAT charged on what they sell. Under the Flat Rate Scheme, that two stage process is simplified to one step.


    The percentages for each type of business vary.  The flat rate scheme is designed to give the government roughly the same amount of VAT, but is easier to work out.  Because it is an approximation, some businesses will pay more, and some less. The government is concerned that some businesses are using the Flat Rate Scheme to pay less VAT than is appropriate.


    What is changing? - In the Autumn Statement the Chancellor announced changes which affect businesses which have a very low cost base. These businesses are now called "limited cost traders". Limited cost traders can still use the Flat Rate Scheme, but their percentage will be 16.5%.


    A limited cost trader is defined as one that spends less than 2% of its sales on goods (not services) in an accounting period. When working out the amount spent on goods, it cannot include purchases of capital goods (such as new equipment). food and drink (such as lunches for staff) & vehicles or parts for vehicles (unless running a vehicle hiring business). A firm will also be a limited cost trader if it spends less than £1,000 a year, even if this is more than than 2% of the firm's turnover on goods.


    Who will this affect? - It will increase the VAT paid by labour-intensive businesses where very little is spent on goods. For example, this may affect IT contractors, consultants and hairdressers.


    When does this start? - The new rules start on 1 April 2017.

  • Reclaiming VAT on pre-registration purchases

    Registering for VAT entitles a business to reclaim VAT on most of its expenses, but a lot of businesses do not realise that there are generous provisions which allow you to reclaim sometimes substantial amounts of VAT on some expenses incurred before registration.


    There’s a time limit for backdating claims for VAT paid before registration. From your date of registration the time limit is:


    • 4 years for goods you still have, or that were used to make other goods you still have
    • 6 months for services


    You can only reclaim VAT on purchases for the business now registered for VAT. They must relate to your ‘business purpose’. This means they must relate to VAT taxable goods or services that you supply.


    You should reclaim them on your first VAT Return (add them to your Box 4 figure) and keep records including invoices and receipts, a description and purchase dates and information about how they relate to your business now.

  • What are my options for dealing with VAT on road fuel?

    If a business is VAT registered and purchasing fuel for business use, but there is also private use of the vehicle an adjustment is required to ensure no VAT is claimed on the private use of the fuel.

    There are four different options to consider when dealing with the VAT in these cases:


        Reclaim no VAT on any fuel purchase;

        Reclaim VAT on fuel used for business journeys only;

        Reclaim all the VAT on fuel and then repay the VAT on fuel used for private journeys; or

        Reclaim all the VAT on fuel and account for VAT using the flat rate charge.


    There is little advantage to using option 1 unless you have minimal business mileage. Options 2 and 3 will require detailed mileage records to be kept of both business and private journeys for each car. Option 4 uses the car’s CO2 emissions, the scale charges are added to the Output VAT.


    If a business is using the VAT Flat Rate Scheme no VAT is claimed back on fuel as input VAT is automatically adjusted using the flat rate percentage.

  • Can I reclaim VAT on entertaining expenses?

    The treatment of entertainment varies, according to who is being entertained.


    If you are entertaining your employees, then it is classed by HMRC as “staff entertainment”, which is tax-relief allowable. You will also be able to reclaim the expense of any VAT you pay on entertainment expenses. However, this rule only applies if you are hosting an event to entertain your employees; if you are entertaining clients then you will not be able to reclaim VAT or claim tax relief. If, for example, you host a mixed event where you are entertaining both employees and clients, then you will only be able to claim back the VAT that you spent entertaining your employees.




    • VAT on business entertainment for third parties can never be reclaimed.
    • Reclaims may be allowed for VAT related to staff entertainment. The entertainment must have a discernible business purpose.
    • Where the entertainment is for both employees and outsiders, it may be possible to reclaim some VAT.
  • Getting the paperwork right

    Proper VAT invoices must be issued for supplies to VAT-registered businesses.


    • A full VAT invoice should include a unique identifying number; the supplier’s name, address and VAT number; the customer’s name and address; the invoice date; the tax point (if this is different from the invoice date); the type of supply (such as sale or rent); a description of and the amount of goods or services supplied; unit price; any cash discount rate; the VAT rate; the total excluding VAT; the VAT amount and the total payable.
    • VAT invoice numbers must be sequential, with no unexplained gaps.
    • Duplicate invoices must be clearly marked.
    • If you issue other documents (eg pro-forma invoices), which show the same details, they must clearly state ‘Not a VAT invoice’.


    If you make retail sales under £250 (including VAT), you can issue customers with a ‘less detailed’ VAT invoice.


    • This must show your name; address; VAT number; the date of supply; a description of the supplies; the amount (including VAT) and the VAT rate charged.


  • PayPal

    If you make sales through paypal, make sure that you add any paypal fees back on to your sales to get your true turnover figure, a point that many online businesses miss.

  • Useful Links

  • Cancelling your VAT registration

    You must cancel your registration if you’re no longer eligible to be VAT registered. For example:


    • you stop trading or making VAT taxable supplies
    • you join a VAT group


    You can ask HM Revenue and Customs (HMRC) to cancel your registration if your VAT taxable turnover falls below the de-registration threshold of £83,000.


    How to cancel - You can apply to cancel your VAT registration:


    • online - through your VAT online account
    • by post


    You must do this within 30 days of your reason for cancelling the registration or you may be charged a penalty.