VAT - An Essential guide for Small Businesses

It is important to track turnover carefully as when a business exceeds the VAT threshold it must register for VAT.

1) When to register for VAT
A business should register for VAT when turnover for the last 12 calendar months (not accounting year) exceeds £70,000. Turnover is defined as sales before tax. A business should also register if turnover is likely to exceed £70,000 in the next 30 days or if a VAT registered business is taken over as a going concern. If a business makes significant VAT inclusive purchases and sales to VAT registered customers, it may be beneficial to register for VAT on a voluntary basis.   

2) Disadvantages of registering

• Compliance: VAT returns must be submitted on-line on a quarterly basis one month after the quarter end. It is therefore imperative that up to date records are maintained to meet the filing deadlines.
• If a business sells mainly to consumers, then registering for VAT means passing on VAT by way of increased prices or reducing margins by absorbing the VAT. I have a client who recently registered for VAT as the business turnover reached the VAT threshold. The business is business to consumer and due to the economic downturn the owner decided not to pass all of the VAT increase on to customers and therfore for the business to absorb most of the VAT.
• Keeping up with changes in VAT legislation; VAT rates have changed so it is important to check regularly to ensure that you're using the correct rates. It is important to ensure that the business accounting software can cope with the different rates of VAT.
• It is important to be aware that VAT cannot be claimed on all items of expenditure and that depending on the nature of the supply, VAT rates can vary. For example, VAT cannot be re-claimed on business entertainment although VAT on staff entertainment may be re-claimed.
• Penalties for late filing. Late filing is taken seriously and there are various penalties for failure to meet deadlines and for filing inaccurate returns. 

3) Advantages of registering

• It may be beneficial to register for VAT where expenditure is VAT inclusive and sales are business to business, therefore, where VAT is a pass-through. I have a client that registered for VAT on a voluntary basis as it was beneficial to the business to recover VAT on significant start up/capital expenditure costs. The VAT refunds were hugely beneficial to the cash flow of the business.  

4) Mechanics of registering
VAT returns must be filed on line with HM Revenue & Customs.

5) Tips

• Register as soon turnover reaches the threshold. Failure to do so will result in a penalty and a charge for the VAT that should have been declared.
• VAT can be re-claimed on supplies three years pre-registration (if the business still has the goods) and services provided six months pre-registration. 
• There are a number of schemes to help small businesses with VAT. For example, the flat rate scheme is an annual VAT scheme which aims to simplify accounting for VAT.

6) When to De-register

• If the circumstances of the business change it may be necessary to de-register for VAT.

VAT is a complicated tax. If you would like any advice on this area or any other areas of accounting or tax, please contact me on 07834988638 or mail@sjhaccounting.co.uk, www.sjhaccounting.co.uk. Sarah Hamilton takes every care to ensure that the material is up to date and accurate. However, no responsibility for loss to any person acting or refraining from acting can be accepted by Sarah Hamilton. You should always ask your accountant to give you specific advice which is tailored to your personal and business circumstances.