Becoming VAT registered can be a little daunting for those new to business. It means keeping your accounts records organised and up to date and ensuring that you have VAT receipts for all the business expenses you want to claim back VAT on. It also means that you need to know whether the products or services you sell should have VAT added.
Businesses don't need to register for VAT until they reach the VAT threshold which is currently, in 2020, £85,000. This is £85,000 of income over a 12 month rolling period i.e from April one year to March the next year, or from November one year to October the next year. When you reach the threshold you will have to register for VAT within 30 days.
Unless you sell products or services which are exempt from VAT, you must total income from all your sales whether they are zero rated or standard rated.
Businesses which sell only products and services which are exempt from VAT cannot register for VAT and therefore cannot claim back VAT on any of their expenses. Examples of sales which are exempt include insurance, financial services, public postal services and stamps. Some businesses which provide exempt products or services may also provide services or goods which they must charge VAT on and therefore they must register for VAT when the income on these sales reaches the VAT threshold. However once VAT registered the business can only claim back VAT on purchases in the same proportion as the income on which VAT is charged. For example, if 10% of income has VAT charged, then only 10% of the VAT on purchases can be claimed back. This calculation is called Partial Exemption. This is frequently the case with equestrian related businesses and property rental.
Businesses which sell only zero rated products such as books, newspapers, magazines, printed music, children's clothes, protective clothing, food, animals, some animal feed and hay must still register for VAT when they reach the registration threshold. Once registered these businesses can claim back VAT on all the purchases which include VAT. It is therefore, advantageous for a business which sells solely zero rated products or services to register for VAT voluntarily before reaching the threshold as they will receive a refund of the VAT they have paid to suppliers from HMRC every quarter.
Most businesses, though, will not sell only zero-rated items and they must weigh up whether it is advantageous to register for VAT before reaching the VAT threshold. This will depend on whether they sell to consumers or to other VAT registered businesses. Whatever your situation though, you must register for VAT when you reach the VAT registration threshold.
Once you have registered for VAT you will need to prepare and submit VAT returns to HMRC on a quarterly basis. If you will be regularly in receipt of VAT refunds you can request to submit monthly returns. Whether your returns are done monthly or quarterly you will need to keep your accounts up to date as you will need to submit returns on or before the due date to avoid receiving late penalties. You should also ensure you have supporting invoices and receipts for each transaction you are claiming VAT on and that the invoices to your customers contain the necessary information as required for VAT registered businesses.
Becoming VAT registered may seem complex and maintaining your accounts a chore but it is a necessity if you have a growing business. However it isn't a necessity for you to manage either the accounts or the VAT yourself when you can outsource. Bookkeepers work with VAT all the time and have the knowledge and experience to keep you on the right side of HMRC. If you need help with your accounts and VAT give us a call and see how we can make keeping your accounts and submitting your VAT returns stress-free.