VAT Accountants

Simplifying VAT Accounting for Self-Employed People and Small Businesses

Expert VAT Accounting

If you’re new to self-employment, Value Added Tax (VAT) may well be something of an afterthought. As you build your business, it’s likely that your turnover will be below the mandatory VAT registration threshold, and although you can register voluntarily if your turnover is below the threshold, VAT can increase complexity for the self-employed.

It’s true to say that VAT is the most misunderstood form of tax in the UK. From the perspective of the consumer, VAT isn’t a consideration as it’s included in the price paid for taxable goods and services. The picture is more complex for businesses but there are various advantages of registering for VAT.

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What is VAT?

VAT came into effect in 1973 and is a consumption tax levied on businesses by the Government on the sales of taxable goods and services, as well as on commissions and business assets, by VAT-registered businesses usually at a rate of 20%. Some essential goods such as housing, fuel, food and children’s clothing are either VAT-exempt or VAT is levied at a reduced rate of 5%

VAT-registration is not compulsory for all businesses but it’s important to know whether your business must register in order to avoid fines and penalties. Businesses with an annual taxable turnover of more than the current £90,000 VAT threshold have to register for VAT. Registration is not mandatory for businesses with a taxable turnover below this amount, but voluntary registration is an option.

Once you’re VAT registered you will receive a VAT registration certificate from HMRC which will include your VAT number, confirmation of the due date for your first VAT return and your date of registration. Once your VAT registration is complete, you must:

  • Charge the relevant VAT rate on the taxable goods and services you sell
  • Pay VAT on goods and services bought from other VAT registered businesses
  • Complete a quarterly VAT return

What is a VAT Return?

VAT registered businesses must complete and submit a quarterly VAT return to HMRC. The VAT return breaks down how much VAT you have to pay by showing the amount of output VAT generated by sales made by your business minus input VAT which is the total VAT that’s reclaimable on purchases made by your business. The resulting amount is what you owe to HMRC, but if the input VAT is higher than the output VAT, you will receive the difference back from HMRC.

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What are the Benefits of Being VAT-Registered?

Though it’s not mandatory to register for VAT if turnover is below the £90,000 threshold, you can still voluntarily register. Many business owners view VAT as an unnecessary hassle but there is no denying there are benefits to the scheme for business owners.

Being VAT registered improves the perception of your business giving an impression of professionalism and trustworthiness, both with other businesses and suppliers. This can help you win new work and many businesses will only deal with other VAT registered businesses.

VAT paid on goods and services purchased for your business can be claimed back. If you’ve invested heavily in equipment for your business, a large amount of VAT can potentially be reclaimed and you might even receive money from HMRC rather than the other way round. Being VAT registered can also help with your cashflow as your prices will be 20% higher and VAT can be claimed back on costs.

Is Your Business VAT Exempt?

Your business is VAT exempt if you only sell goods or services that are exempt from VAT. Examples include fundraising events by charities, finance, credit, insurance, education and training and subscriptions to membership organisations.

It’s important to note the difference between VAT exempt items and zero-rated items. Although neither has VAT added to the selling price, zero-rated goods and services count towards your taxable turnover and should be taken into account in your VAT returns.

If your business is VAT exempt you can’t register for VAT and don’t need to keep VAT records or submit VAT returns. VAT also can’t be reclaimed on business purchases.

Certain businesses can be partly exempt from VAT in instances where VAT was incurred on the purchase of exempt supplies.

What is the Right VAT Scheme for You?

There are several different VAT schemes to choose from so you will want to choose the scheme that offers the most benefits to your business. As expert VAT accountants, we can advise you on your eligibility when it comes to the different types of VAT schemes and which is the best option for you.

The majority of VAT registered businesses operate under the standard VAT scheme. The standard rate scheme is appropriate for a wide range of businesses and VAT is charged at 20% and your VAT liability is calculated as the difference between input and output VAT each quarter. VAT can be reclaimed on eligible goods or services your business buys or sells.

Your business can join the flat rate VAT scheme provided its VAT registered and VAT taxable turnover isn’t expected to exceed £150,000 within the next year. The flat rate scheme differs from standard rate VAT as the rate of VAT payable varies based on the sector or industry that your business operates in with rates between 4% and 14.5%.

The purpose of the flat rate scheme is to simplify VAT and reduce the administrative burden on businesses. Businesses in the flat rate scheme pay a set rate of VAT as a percentage of their turnover rather than calculating input and output VAT. You can’t, however, claim back VAT on purchases made and you must leave the flat rate scheme if your annual taxable turnover exceeds £230,000.

If your business spends less than 2% of its annual VAT-inclusive turnover on goods or it spends less than £1,000 a year on goods if costs are higher than 2%, it’s classed as a limited cost trader. Limited cost traders pay VAT at a higher rate of 16.5% under the flat rate scheme.

Many small businesses opt for the cash accounting scheme which enables them to pay VAT on sales when customers pay them and reclaim VAT on purchases made when they have paid the supplier. Only businesses with a turnover below £1.35 million can use this scheme. The cash accounting scheme helps to simplify VAT and can also help with cashflow.

How a VAT Accountant Can Help

As expert accountants for the self-employed and small businesses, VAT accounting is one of our many specialities. It’s important to choose the best VAT scheme for your business taking into account various factors including your turnover, the sector you operate in and which purchases you can claim VAT on.

Each quarter your dedicated accountant at Gorilla will calculate your VAT liability. This is reported to HMRC on your VAT Return which is submitted through FreeAgent and any amount due is then paid to HMRC. We often recommend our clients to voluntarily register for VAT, even when turnover is below the mandatory registration threshold.

By registering immediately, you will have access to the advantages of being VAT registered and your dedicated accountant will always work closely with you to provide unlimited expert advice and support on VAT and all your business and personal accounting needs.

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If you’re ready to take the next step and form your limited company, get in touch with a member of our New Business Team by calling:

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