As customers, we pay VAT on almost everything we purchase. As business owners, it’s important to understand how the tax works, when we should register and if we can benefit from early VAT registration.
What is VAT?
VAT, or Value Added Tax, is a general tax collected by tax authorities based on the value of a product or service. Known as a consumption tax, it is charged by VAT-registered businesses to the customer at the point of purchase. The cost of the tax is charged as a percentage of the sale price. It is then the responsibility of businesses to pay VAT bills to the relevant tax authority on all goods and services sold. In the UK, VAT is controlled and collected by HMRC.
To avoid ‘double taxation’ on products or services, businesses that are VAT-registered are able to reclaim the VAT they have paid as part of their business operations. For example, a business would be able to reclaim VAT on equipment used in the manufacture of goods or for business travel vital for carrying out services.
When Should I Register for VAT?
VAT registration is not unique to limited companies. Whether you are a sole trader, a partnership, club, association or limited company registering for VAT – the requirement to register is based on your earnings over a 12-month period. So, it doesn’t matter if you’re just one person or a full team.
Known as a VAT threshold, your business must legally register for VAT if you pass this threshold over any consecutive 12 months. Like VAT rates, this threshold is set by HMRC.
The VAT registration threshold for 2022/23 is £85,000
You can either register when you hit this threshold or register for VAT early. It may make sense to voluntarily register earlier, if, for example, you generally pay more VAT to suppliers than you would receive from customers through sales.
To register for VAT, you have a few options. You can either do so online through your Government Gateway account. Or, by post by completing a VAT1 form and sending it back to HMRC.
You can also register through a professional accountant who can do so on your behalf. To register through an accountant, you’ll need to complete a 64-8 form.
What Does VAT Exempt Mean
VAT exemption is a term that refers to products or services that do not meet the threshold for VAT. There are two scenarios where this threshold may not be met. This may be because the product or service is sold by a business whose 12-month earnings do not meet the VAT threshold. In this case, the business is not required to charge VAT and it is not passed on to the consumer.
It may also refer to specified products or services that consumers do not have to pay VAT on. These items include everything from health products, to insurance, to lottery tickets. HMRC provides an exhaustive list of all VAT-exempt products and services online.
How Professional Accountants Can Help With VAT for Businesses
While it’s certainly possible to register, submit and pay your business’ VAT, it is not a simple process. With so many other plates to juggle as a business owner, using a professional and experienced accountant, like those at GGM Accountancy, can help remove the stress and admin from your yearly accounts. Professional accountants can help by:
Registering your business: By working together from the start, your accountant can register your business when required and assess if early registration could be beneficial.
Assessing your yearly accounts: As part of your tax requirements, your accountant will assess your earnings to ensure that you’re meeting all legal guidelines and procedures for VAT.
Ensuring you pay the right amount of tax: Your accountant will ensure you don’t pay too much or too little tax, based on your earnings and expenditure.
Submitting your tax returns: Submitting your tax returns can be a laborious process, made even more complicated by the 2019 Making Tax Digital Act. While this makes the tax system as a whole more efficient, it does mean using compatible software to submit your returns. Your accountant will do the hard yards using MTD-compliant software.
Offering regular advice: As well as providing VAT support, your accountant can also offer additional advice on other areas of your business that may help save you money.