VAT can make even the most experienced business people break out in a cold sweat. So you need to understand and manage VAT. Actually, it’s not hard to get right but it is very easy to get wrong.
Whoa, VAT! Firstly, if the thought of Value Added Tax makes you tremble, you’re not alone. Many business people discover that their first big stumbling block, once they have their beloved company established, is how to treat VAT.
And one story you’ll hear time and time again is that when you first register for VAT, it can appear that the UK government is giving you a nice pile of unexpected cash.
However, the surprise can come months later when the government comes to collect VAT from you and you’re asked to pay a big bill. For many businesses, that can be a shock – and if the company’s cash flow can’t cope, it could be the end of it.
So, although not wanting to frighten you, when it comes to VAT, you need to be very wary and avoid cutting corners. You need some good software behind you and a good accountant.
The good news is that you don’t have to start making VAT arrangements until your turnover hits £85,000, so it may not be a problem. But with a growing business, it’s surprisingly easy to get there. So if you’re aiming for expansion, it’s wise to start thinking about VAT straight away and understand it.
Implications of being VAT registered
I’ll let one of the Sage Business Experts, Sudipa Moore, explain the technicalities. Sid, as she is known, is the owner of growing South Manchester-based practice, Moore Accountancy, which she established in 2010.
She trained as a Chartered Accountant in a medium-sized central London practice during the 1990s before moving into various industry sectors.
Sid says: “The implications of being VAT registered mean that you must ensure you pay VAT quarterly to HMRC, so it’s really important that your accounting records are there and detail the VAT on your sales, less the VAT on your purchases, so you know how much to pay HMRC each quarter.”
However, if your business’s turnover is less than £85,000, you might still decide to be VAT registered. Sid says: “Deciding to be voluntary VAT registered is an important decision. If most of your supplies are to other VAT registered businesses, then it may be worth you becoming VAT registered, even if you are below the VAT threshold.
“For example, if you’re a painter and you charge £100 a day as a standard day rate, if you are VAT registered, you charge £120, £100 plus £20 VAT. If you are supplying your service to a VAT registered business, because you are painting their office for example, they can claim that £20 back off their next VAT bill.
“However, if you are charging £120 to an individual, a homeowner, and you’re painting their hallway, then in that instance, they have just had a 20% increase on their bill.”
Therefore, they would be paying £120 instead of the £100 they would have paid if they were not VAT registered.
If your business is VAT registered, it’s important to put processes in place to manage it
How to manage VAT
Putting processes in place to manage VAT will keep your business on the straight and narrow.
Sid says: “The way to manage VAT is to ensure that you have good record keeping, ensure your sales and the VAT on your sales are recorded properly, and the VAT on the purchases are also recorded properly.”
“That means when you do your VAT return, you can easily see how much VAT you have to pay to HMRC.”
Here’s a few more tips from Sid, which should stand you in good stead.
She says: “Something to think about for your small business in terms of managing your VAT is to ensure you set up a direct debit, so you file your VAT return to HMRC and then it takes a direct debit from your bank account to settle the VAT bill. You actually get a few days’ grace; you get a few extra days to have the money come out of your account.
“Another benefit of it is you don’t ever forget to pay your VAT bill, which means you don’t go on the VAT hit list where you start being charged surcharges for paying VAT late.”
Got that? Right, here’s the next tip: “Another way to manage your VAT would be to each month see what your VAT liability is and put that into a separate savings account,” says Sid. “And then at the end of each quarter, transfer money out of your savings account to settle you VAT bill.
“That means you don’t keep looking at your current account thinking that you’ve got all this money when really some of that money belongs to HMRC.
“I think people forget that with VAT and the other taxes. They think the money is theirs. They’re like: ‘Oh I’ve got £120,’ when really they’ve only earned £100.”
Reclaiming VAT
Paul Hyman is the founder of Active360, a paddle boarding and general sports business. His company looks at sport from every angle, from participation right through to equipment and staff training. Uppermost in his mind is how to give his customers the best possible sporting experience.
As for he how approaches VAT, Paul says: “We registered for VAT before we had to – we went ahead because we were buying a lot of equipment and we wanted to reclaim VAT – basically 20% of everything we take is taken by the government as a tax.
“Because VAT takes a large amount of our income, one thing that works for us is if pay for systems and pay for equipment. It saves us outgoings on future expenditure.”
In short, don’t be afraid of VAT. It might seem like needlessly complicated paperwork that can slow small businesses down but it can also be used to your advantage. Learn how to manage it and let it work for you. Much depends on the type of business you have of course which is why, as I stressed earlier, when it comes to VAT, it’s worth getting some help.
Small business guide to VAT
Managing VAT can be a pain for many small businesses - but it doesn't have to be! Everything you need to register and submit VAT and staying compliant is right here.
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There’s a typo in this document which could cause confusion:-
““However, if you are charging £120 to an individual, a homeowner, and you’re painting their hallway, then in that instance, they have just had a 20% increase on their bill.”
Therefore, they would be paying £120 instead of the £100 they would have paid if they were not VAT registered.”
Last line should surely read “….. if YOU (i.e. the supplier) were not VAT registered”.