VAT might initially seem like an intricate maze for small business owners in the UK.
However, with a proper understanding of when and how to navigate it, VAT can be seamlessly integrated into a business’s financial strategy.
Here’s a breakdown of the essentials small businesses need to know about VAT, its potential benefits, and some common pitfalls to avoid.
When should a small business register for VAT?
In the UK, if your business’s taxable turnover exceeds the VAT threshold (currently £85,000), you must register for VAT.
This threshold applies to a rolling 12-month period, not just the current financial year. If you anticipate that your turnover will exceed this limit in a single month, you must also register.
However, voluntary registration is possible even if you don’t hit the threshold.
Why might you want to do that? Here are a couple of potential benefits:
- Reclaiming VAT
Once registered, a business can reclaim VAT paid on business-related goods and services.
- Enhancing business profile
Being VAT-registered might give your business a more professional image, especially when dealing with other businesses.
Advantages of the VAT flat rate scheme
The VAT flat rate scheme is a blessing for many small businesses.
Instead of deducting VAT on every individual purchase and sale, businesses simply pay a fixed percentage of their turnover as VAT.
The rates vary depending on the nature of the business.
Benefits of this scheme include:
- Simplicity
Reduces the time spent on accounting and paperwork.
- Predictability
It’s easier to forecast VAT obligations.
However, the scheme might not be beneficial for all. If you incur a lot of VAT on purchases, the traditional method might allow you to reclaim more.
Common issues
Navigating the world of VAT can be tricky, and errors can be costly.
Incorrect VAT rates
With standard, reduced, and zero rates, ensure you’re charging the right amount.
Keeping abreast of any changes in VAT rates is essential.
Late registration
If your turnover exceeds the VAT threshold, register promptly. Delaying can result in penalties.
Missing deadlines
Ensure VAT returns and payments are on time.
Investing in accounting software or hiring a professional can help in tracking these deadlines.
Not keeping proper records
Every invoice, receipt, and financial document must be kept for at least six years. Digital systems can make this process more manageable.
VAT can be a complex topic to get your head around. Get in touch for advice on this for your business.
