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A guide to VAT for small businesses

Business Finance

A guide to VAT for small businesses

Updated: 9 June 2023

As a business owner it’s important to understand who needs to pay VAT and how it may apply to your business in specific instances. In this article we’ll take a close look at VAT and discuss how to register for VAT, how to claim VAT back and the current VAT rates. 

What is VAT?

VAT stands for Value Added Tax. It is a tax charged on goods and services provided by businesses in the UK. If you are liable to pay VAT, you must charge the applicable rate when providing goods or services to your customers, then pay the VAT collected to HMRC every quarter. The fact that VAT is due quarterly means that it must be monitored on an on-going basis. Thanks to HMRCs Making Tax Digital initiative, any VAT returns your business needs to file are done digitally.

The accounting and tax planning implications of VAT must be understood by any business which crosses the small business VAT threshold.

The basic points are:

  • VAT is charged when you sell goods and services to your customers 
  • VAT is paid when you purchase your own raw materials, stock or services

The key thing to understand is that any VAT your business has to pay, can be claimed back as a business expense (if your business is VAT registered). This means your business pays HMRC the difference between the VAT you’ve charged your own customers and the VAT you’ve paid. If you find that you’ve paid out more in VAT than you’ve taken from your customers, then HMRC will cover the difference.     

What is the threshold for paying VAT?

The question of whether your business needs to register for VAT hinges upon your turnover, i.e. the total amount of sales your business makes on an annual basis. Currently, if this figure is higher than £85,000, you will need to register your business for VAT and start charging it on the goods or services you provide. 

What are the advantages of registering for VAT? 

In some instances, it may prove beneficial to voluntarily register for VAT before hitting the £85,000 threshold. The benefits of doing so include the right to claim back any VAT you have to pay out for goods or services from other VAT registered businesses. Plus, being VAT registered can help make your business appear more established.

How to register for VAT

The good news is that registering for VAT is a quick and simple process. If your business employs an accountant, they can register on your behalf. If not, you can register through the HMRC’s online portal. If you do opt to register for VAT online, you’ll need to provide the following information:

  • The name of your company (if it is run as a limited company)
  • Your National Insurance number
  • Your Unique Taxpayer Reference (UTR)
  • Your business turnover
  • Some details of what your business is and does
  • Your bank details

Once you’ve registered for VAT, you’ll be sent a VAT Registration Certificate within 30 working days. This will include the unique VAT number you’ll need to reference when submitting VAT returns and also the submission deadline for your first VAT return. This is a very important date as it will set the benchmark for on-going quarterly returns. 

Current VAT rates

Once you’ve registered for VAT, you need to figure out which rates apply to the goods or services you provide. The standard rate of VAT is currently 20%, and this covers most goods and services. There are some exceptions however:

  • Reduced rate – the reduced rate of 5% VAT applies to items such as domestic energy and children’s car seats.
  • Zero rate – the self-explanatory zero rate (i.e. no VAT is charged) applies to a range of goods, including food, children’s clothing and books. 

If you need to start charging VAT for your goods or services then the details will need to be included on any invoices given to customers. 

How to submit a VAT return

VAT returns need to be submitted within one month and seven days of the end of a VAT period. You can find out the specific dates on which your returns and payments are due by checking your VAT account online. 

Armed with your VAT number, and having set up your VAT account online, the process of actually submitting your return is relatively simple. HMRC provides a free online service, although if you’ve signed up to Making Tax Digital then you’ll have to submit using compatible accounting software. 

Spreading the cost of your VAT bill with FlexiPay  

If paying a quarterly VAT bill puts a dent in your cash flow, you can spread it out monthly using FlexiPay. It’s free to set up and you only pay when you use it, with a simple flat fee. It can be used for a wide variety of payments including stock and invoices, and HMRC bills are one of the most popular uses among our customers. 

How to claim VAT back

As stated, as well as having to charge and pay VAT back, you may be in a position to claim back the VAT you’ve been charged on business expenses from HMRC. In order to do so, you’ll need to provide a valid VAT invoice including details such as:

  • The name and address of the supplier
  • The invoice number
  • The VAT registration number of the supplier
  • Details of the relevant product or service
  • The date of the payment 
  • The total cost excluding VAT
  • The amount of VAT charged

Keep hold of your receipts and invoices or use an accounting tool to help you track them as you go. 

While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.

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