As the owner of a small business, there are a few things you should be aware of when it comes to VAT – or “Value Added Tax”. It’s important to ensure that you are fully educated on these matters, as a failure to adhere to the rules may result in you and your business being investigated for fraud. So what are the first things you should know about VAT?
You will pay VAT – usually of 20% – on certain supplies and services you receive as a company (this is known as your “input tax”), and you’ll also charge VAT on certain products and services that you provide for your customers (this is your “input tax”).
No matter which is the greater of the two amounts, you will need to regularly file VAT return forms with HMRC. If your input tax is greater than your output for the period in question, you’ll receive a refund – unless the products and services you supply are VAT exempt. If your output tax is the greater amount, which is usually the case, you’ll need to pay any surplus to HMRC.
It’s very straightforward to get your business VAT registered. You accountant will be able to provide paper forms that will enable you to do so, but you can also manage this yourself online.
This second method is much more straightforward. You’ll find further information about how to do it here.
Remember, you may be able to claim VAT on certain purchases you made before registering.
As soon as your company’s taxable turnover hits or exceeds £85,000, you will be legally required to register for VAT. You can do this if you predict that the current financial year’s turnover will reach the threshold amount, or as soon as you discover that this has been the case for the previous year.
You do not need to register if your company does not currently make this amount – however, you may choose to voluntarily do so. This might be helpful if you regularly invest in large numbers of taxable products and services to aid in the running of your business, as you will be able to claim that VAT back.
You may also choose to voluntarily register in order to add a sense of credibility to your business. Having a VAT number naturally influences customers to believe you are a larger company with a greater turnover.
With the standard VAT system, the amounts you pay HMRC – or the size of the refund you can claim – is calculated on a case by case basis. However, there is a flat rate scheme for which you can register. As the name suggests, this means that you regularly pay one set amount to HMRC. While you are not able to reclaim tax spent on most business purchases (except capital assets worth more than £2,000) while part of this scheme, you will be able to claim the difference between the amount you’ve been charged and the amount you charge your customers.
To be eligible for the flat rate – which considerably reduces the amount of administrative work that goes into filing your VAT return – you need your taxable turnover to be more than the abovementioned threshold of £85,000 but less than £150,000 per annum. If you hit more than £230,000 the year following your registration, you will no longer be eligible for the flat rate scheme.
Exact dates depend on whether you have arranged to file your return monthly or quarterly. Either way, the deadline is a month and seven days after the relevant tax period.
For example, if you pay VAT quarterly, you should complete, file and make a payment for your third-quarter tax return (encompassing 1st July – 30th September) on 6th November.
If you discover that you have failed to register for VAT despite surpassing the threshold, or that there have been any other mistakes regarding your company’s tax obligations, it’s vital that you seek legal representation as soon as possible. A good solicitor who is experienced in corporate and commercial law will help you to argue that any incorrect statements or returns occurred purely accidentally – helping you to avoid prosecution and potentially hefty fines.
This post was written by Shahid Miah, director of Birmingham-based fraud solicitors, DPP Business & Tax. Over the years he has acted for a number of high profile individuals in defending them against the most serious of high-value fraud charges and investigations.