As a business owner, you might be having some difficulty in understanding VAT, regardless if you already have some experience of it. If it is your first time to register for VAT, then its worthwhile to consider its effect on your pricing.
What is the connection of VAT to your pricing?
It is a must that businesses should register for VAT provided that its taxable turnover will reach the threshold for VAT registration.
Once these businesses have registered for VAT, they should charge VAT on the taxable sales that they have obtained from their customers. This provides you the following options:
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- The price remains the same and incorporate the VAT. In this option, you won’t make any changes to the amount that you charge to your customers. However, you will only have less profit since you are the one paying the VAT out of the money that you’ve earned.
- VAT is added to the current price. As a result, your customers will be paying a higher amount. If these customers are not VAT registered, then they can’t reclaim the VAT, hence, your new price could discourage them from buying.
In other words, registering for VAT can create a big impact on your business as well as hoe you charge for your products or services.
How much VAT should you charge on your products or services?
Most likely, the amount of VAT that you should charge will greatly depend on what you are offering. Keep in mind that there are certain rules for charging and paying VAT. And these differs for products and services that are imported or exported.
The majority of goods and services sold fall under the standard rate of VAT. This is currently charged at 20% as of the 2020-21 tax year.
This refers to those items which have reduced rate of VAT which is presently 5%. These items include mobility aids for people who are more than 60 years old, domestic fuel, as well as car seats designed for children.
There are also some products or services that are zero-rated for VAT. For instance, motorcycle helmets, newspapers, books, and children’s clothes. However, even if these items are charged at zero rate, the sale is still taxable under VAT. Zero-rated for VAT means that the tax that you will charge to your customer is 0%. You still need to include these sales to your VAT accounts and on your VAT return.
Factors to consider when charging VAT
There are several things that you need to consider with regards to your pricing after you have registered for VAT.
Who are your main clients?
Most often, your pricing structure can be affected by your target market or major customers. For instance, are you selling to other businesses (B2B), or are you selling to consumers (B2C) for their own use?
If you are selling mostly to other businesses, are they VAT registered? In other words, they can reclaim any VAT and offset them against their own VAT. However, if they will pay the VAT directly to you, then this could influence their short-term cashflow.
On the other hand, consumers who are not VAT registered might get discouraged by the 20% increase on the price due to the VAT. Nevertheless, if you will not add this to your price, then you will be the one paying for it rather than your customers. Just like any other business decisions, it will greatly depend on your personal situations. The following are some important things that you might consider:
- Research how much does your competitors are charging, and whether or not this incorporates VAT.
- Include a small portion of VAT into your price, which means that there is only a smaller price increase. This is because the VAT is shared between you and your customer. For instance, increasing your price by 10% means that your customer is paying half of the VAT, and the other half is paid by you.
- Inform your customers in advance about any price increase.
What is the rate of VAT applicable to your goods or services?
If the goods or services that you are offering belong to the zero-VAT or reduced rate category, then the pricing will not be greatly affected. Adding 5% to the price is not so dramatic, much more for the zero-rated items. If you are having difficulty in determining which VAT rate to use, then you can refer to the rates of VAT on various goods and services published by the government.
Are you going to register for VAT?
Not all businesses are required to register for VAT. The fact is, most businesses won’t ever have to. However, if your taxable turnover within a 12 month period reaches the £85,000 threshold then you are obliged to register for VAT. Although there are some businesses who choose to voluntarily register for VAT.
Why should you voluntarily register for VAT?
Let’s face it, each one of us is different. Hence, whether or not you choose to voluntary register for VAT will greatly depend on your own circumstances. If you are confused, then you can discuss this with your accountant. Ask them what’s best for you. The following are some important points that are worth considering:
- You can receive VAT refund: Since your business is VAT-registered, then you will have the chance to reclaim the VAT that you have paid on the goods or services that you bought for your business. If the VAT that your business is paying for your purchases is more than the VAT that you have collected from your sales, then HMRC will give you a refund.
- Provides a good impression for your business: If your business is VAT-registered, then you will have your own VAT number which you can display, providing a good impression for your business. It offers a sense of professionalism and legitimacy to your business which is crucial most importantly if you are working in the B2B industry.
- Dealing with other businesses will be much easier: If your company is non-VAT registered then there are some instances wherein some suppliers and other businesses will be hesitant to work with you. As a result, being a non-VAT-registered company might be a hindrance if you are working in an industry where it is preferred and expected.
- Avoid paying tax penalties: Sometimes it’s hard to predict when your business will reach the VAT threshold of £85,000. To avoid paying for those tax penalties there are some companies that choose to voluntarily register, just in case.
- Reclaim VAT from prior years: The good news is if your company is VAT registered then you are allowed to reclaim VAT on purchases made before you registered, provided that these goods or services that you have purchased are still being used primarily for business purposes only.
What are the different ways to register for VAT?
Whether you choose to voluntarily register or you have reached the threshold, the process to register is still the same. There are three ways to register for VAT. These are by post, online, or via an agent. Almost all types of businesses including group of companies and partnerships can easily register online.
How to register for VAT online?
To register for VAT online, the first thing that you need to do is sign into your tax account and fill-up the online form. Afterward, you will receive a VAT number from HMRC, most probably within 30 days. To submit your returns, you will need a VAT online account.
How to register for VAT via an agent?
Instead of doing it by yourself, you can designate your accountant to act as your agent. They will be the ones who will register you for VAT and submit your returns on your behalf. This can save you a lot of time and headache.
How to register for VAT by post?
Among these three methods, the most convenient one is registering online. However, there are some cases wherein you will not be able to register online. The best alternative would be to use the postal VAT1 form instead. The following are some instances which require you to register by post:
- If you want to participate in the scheme for Agricultural Flat Rate VAT.
- If you are interested in applying for a registration exemption. For instance, if the turnover of your business has reached the registration threshold however, it is only temporary.
- If you are trying to register various units or divisions of your business with individual VAT numbers.
What are the responsibilities of a VAT registered company?
After getting ready to be a newly registered VAT business, the next thing to do is to take a look at the succeeding steps. What does it mean if your business is VAT registered? What are the things that you need to do differently now? The following are the responsibilities of being VAT registered:
- You should charge your customers with the precise rate of VAT for the goods or services that they had purchased. Furthermore, these amounts must be shown on your receipts and invoices.
- Consequently, your VAT number must be shown on all your invoices, as well as in other pertinent documents including customs declarations if case you are shipping your products abroad.
- You are required to submit your VAT returns to HMRC.
What is the process for reclaiming VAT?
Keep in mind that registering for VAT is not all about giving away your money to the government. Ultimately, you still have the chance of getting back some of that VAT. Remember that your business is always paying VAT on its purchases even if they are not VAT-registered since their suppliers are.
In case the total amount of VAT that you have paid for your purchases is more than the VAT amount that you received from your customers for your sales, then you have the opportunity to reclaim for the difference. On the other hand, if the amount of VAT that you have collected from your customers is more than the VAT amount that you have paid, then you have to pay the difference to HMRC. This will be shown as part of your VAT return, and you will get a notification stating the amount of VAT that you owe, or is owed to you.