Having to deal with red tape can put many people off starting a business. But, like many things, it’s a lot easier once you know how. Here’s a simple guide to dealing with VAT.
Whenever you buy something (or most things at least) as a consumer you pay VAT or Value Added Tax as it’s known in full. You probably know that. But how does VAT affect you when you are a small business? Here’s a quick briefing on how the VAT system works for small businesses.
VAT is a tax levied on consumers of many products and services. Businesses who buy and sell products and services don’t have to pay it themselves. But they are responsible for collecting it from consumers and paying it over to the tax authorities.
As soon as your turnover reaches the current registration limit (you can find out what this is by checking with the HM Revenue & Customs VAT office) you will need to register for Value Added Tax (VAT). This will mean you’ll need to charge it at the current rate on all your sales whenever you sell your products and services to your customers then pay it over to the tax authorities periodically.
The other thing you need to know is that, when you’re registered, you will also be able to reclaim the VAT you pay on any goods and services you use in your business. (Remember, it’s a tax on consumers not businesses.)
How the VAT system works:
First you’ll need to keep accurate records of all your sales and purchases. Hopefully you’ll be doing this anyway, but when you’re registered for VAT there’s an additional element: Your sales and purchases must show three figures – the net (non VAT) amount, the amount of VAT charged or paid, and the total amount.
Remember that not every product is affected by VAT. Certain things like food, children’s clothing and books are subject to VAT at the (slightly bizarre) rate of 0%. So in practice you don’t charge it on sales and can’t claim it back on purchases.
Next you’ll need to complete a VAT return – which is now done online – showing your sales and purchases and VAT collected and paid once every three months. If you keep good books and records it is fairly straightforward to do this, you don’t need an accountant.
Now do the sums. If the VAT collected exceeds what you’ve paid you’ll need to pay the balance to HMRC. If what you’ve paid out in tax exceeds what you’ve collected they’ll refund the difference to you.
One important point to note is that once you are registered for VAT it will, in effect, increase your prices by the current VAT rate. This shouldn’t matter, however, if most of your customers are other VAT registered businesses – as they in turn will be able to reclaim what they pay. If you are selling to the public it will have the effect of increasing your prices to them.
Contact HM Revenue & Customs VAT National Advice Service for more details: Tel. 0845 010 9000. Website: www.hmrc.gov.uk