The Small Business Owner’s Guide to VAT
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The Small Business Owner’s Guide to VAT

Everything you need to know about VAT as a small business owner working through your own limited company. The following guide has been put together with the help of SJD Accountancy – a specialist accountancy firm that helps small business owners, contractors and freelancers to manage tax compliantly and tax efficiently.

 VAT (Value-added Tax)

Value-added tax (VAT) is a charge that we all pay on top of the cost of most goods and services. You might be wondering whether you need to register for VAT, how this tax works in practice and when you need to submit your VAT Return with HMRC.

Standard VAT scheme: how does it work?

If your company is VAT-registered, you’re required to pay and charge VAT on the products and services you buy and sell.

Charging VAT

For example, you’ll need to add VAT (20%) to every item you sell, with your company’s VAT number clearly detailed. Your customers will then pay this to your business on top of the cost of their purchase. This is often referred to as ‘output tax.’ Every quarter, you’ll need to submit and pay this to HMRC in your quarterly VAT Return.

Paying VAT

 If you register for VAT on the standard VAT scheme, your company can claim the VAT that it has been charged on goods and services bought for the business. From office expenses to equipment and travel costs, you should calculate the total amount of VAT your business has paid each quarter. This is known as ‘input tax’. When submitted as part of your VAT Return, if the ‘input tax’ is greater than the ‘output tax’, you may be entitled to a VAT refund.

While it might be slightly confusing at first, it’s important to note that you shouldn’t lose out by being VAT-registered. The idea is that what you charge and what you pay roughly balances out, with the difference settled in your VAT Return each quarter.

When should I register for VAT?

HMRC requires that any company registers for VAT when it turns over more than £85,000 in a 12-month period or if you expect it to exceed this amount within 30 days. Until your business topples this threshold, it’s up to you as to whether you want to register or not.

How do I register for VAT?

Head to the HMRC website, but make sure you have your Companies House Registration Number along with your Unique Taxpayer Reference. Some other things you’ll need to hand include:

  • National Insurance (NI) number or ‘tax identifier’ – your Unique Taxpayer Reference
  • Certificate of business incorporation/incorporation details
  • Business bank account details
  • Details of your turnover and the nature of your business
  • Details of all associated businesses within the last two years

Your accountant can also take care of this for you, if you need a hand.

You should also start charging VAT straight after you’ve registered. Don’t wait until you receive your certificate from HMRC, which can take anything up to 30 days to arrive.

When are my VAT returns due?

You’ll need to file and pay your VAT return quarterly, no later than 1 month and 7 days after your VAT period has finished. For example, for the quarter ending 31 March, your return must be submitted, and payment cleared in HMRC’s account by 7 May. You can also use the VAT payment deadline calculator on the HMRC website to work out how much time to allow before making your payment.

To find out your exact VAT dates, speak to your accountant if you have one. Alternatively, log in to your VAT online account on the HMRC website for more information.

What happens if I pay my VAT late?

If you are late in submitting a VAT return to HMRC you may face a penalty. The amount will depend on the length of time past the normal submission date that the return is filed and the level of turnover. Below is a general guide to the penalties that would apply to late VAT returns.

Annual Turnover less than £500,000

1st Late return: No surcharge

2nd Late return: No surcharge

3rd Late return: 2% of VAT due (no surcharge if this is less than £400)

4th Late return: 5% of VAT due (no surcharge if this is less than £400)

5th Late return: 10% or £30 of VAT due (whichever is more)

6th & Subsequent late returns: 15% or £30 of VAT due (whichever is more)

Annual Turnover greater than £500,000

1st Late return: No surcharge

2nd Late return: 2% of VAT due (no surcharge if this is less than £400)

3rd Late return: 5% of VAT due (no surcharge if this is less than £400)

4th Late return: 10% or £30 of VAT due (whichever is more)

5th Late return: 15% or £30 of VAT due (whichever is more)

6th & Subsequent late returns: 15% or £30 of VAT due (whichever is more)

What are the VAT rates?

 There are three VAT rates. The standard VAT rate is 20% and applies to the majority of things you’re likely to buy for your business. The reduced VAT rate of 5% is charged to products such as energy services and goods, while the Zero rate (0%) means products like postage stamps are VAT free.

Flat Rate VAT scheme

Thankfully, the government recognised that VAT needed simplifying, so it introduced the Flat Rate VAT scheme. This scheme was introduced to help simplify the VAT system for small businesses, freelancers and contractors. It makes calculating, keeping a record of and paying VAT much easier and a lot less time-consuming.

Under the standard VAT scheme, you’ll need to keep a record of VAT you pay and charge on every product or service bought and sold, before calculating this and filing your VAT Return. In contrast, the Flat Rate VAT scheme means you pay a fixed percentage of your gross turnover in VAT, so you don’t need to keep a record of everything.

In other words, you’ll charge a standard VAT rate of 20% on your invoices but pay HMRC a lower rate to roughly balance out the amount you charge and pay. The rate you pay varies depending on your line of work.

Limited cost traders

Some small business owners are considered Limited Cost Traders, which, in simple terms, are businesses with lower overheads. You qualify as a Limited Cost Trader if your overall expenditure on goods and services is less than 2% of your VAT inclusive turnover or greater than 2% but less than £1,000 a year. This figure shouldn’t include business expenses such as food and drink, vehicle and fuel costs. If your business falls into this category, your Flat Rate VAT percentage is 16.5%.

Here’s how the Flat Rate VAT scheme works in practice, should you qualify as a Limited Cost Trader:

Charge Amount
Invoice to client £5,000
VAT charged to client (20%) £1,000
Total charge to client £6,000
Flat Rate VAT (16.5%) 16.5%
Flat Rate VAT first-year discount 1%
VAT to be paid (15.5%) £930
VAT received from client (20%) £1000
Your flat rate benefit £70

 

What are the other fixed rates?

Given the fixed percentage varies depending on the industry you work in, we’ve dropped in a number of rates that could apply to small business owners who aren’t Limited Cost Traders. For the full list of rates, please visit the SJD website.

Business category Percentage
Accountancy or book-keeping 14.5%
Advertising 11%
Computer and IT consultancy 14.5%
Entertainment or journalism 12.5%
Financial services 13.5%
Building or construction services 9.5%
Management consultancy 14%

 

Am I eligible for Flat Rate VAT?

To qualify for the Flat Rate VAT scheme your business cannot turnover more than £500,000 in its first year excluding VAT. If your company turns over above £230,000 including VAT in the year that follows, you must use the standard VAT rules.

Can I claim VAT back on anything under the Flat Rate scheme?

Only when you buy capital assets that cost £2,000 or more including VAT. A capital asset could be a laptop, machinery, car or property that your business will benefit from for a longer period. If, for example, you’re buying a new laptop, monitor and printer that together amounts to over £2,000, as long as everything is on one receipt – in other words bought at once – you’re able to claim VAT.

SJD Accountancy: here to help

If you need accountancy and tax support for your small business, visit www.sjdaccountancy.com for more information, useful guides and top tips.