VAT Guide for Small Businesses

Have you ever wondered if your small business is draining money due to VAT mismanagement? 

Can optimised VAT submissions pull more profit and scalability to your business? 

A study from BM Magazine show that small businesses lose up to 12% of their revenue due to incorrect calculations, late filings, and failure to reclaim VAT.

This VAT guide will answer all your questions so you can turn VAT from a burden into a tool for success.

What is VAT (Value Added Tax)

VAT is a consumption tax applied to most goods and services. It is charged at each stage of production and distribution. Businesses collect VAT on sales and pay it on purchases, with the end consumer bearing the cost. 

Yet, there is a specific taxable turnover threshold of £90,000, after which you must register VAT. Still, you can voluntarily register your business VAT through a small business accountant.

And while there is an appreciative bright side to volunteer VAT registration, there are also some downsides.

Pros and Cons of VAT Registration
Pros	Cons
Reclaim VAT on Vatable expenses	Won’t be Competitive Anymore.
Better Financial Insights	Market Share will Become Lower.
Expand the Scope of Business	Will impact your Cash Flow
Attract VAT registered Clients	Increase the Administrative Burden

How to Register VAT?

You can register for VAT online in a few easy steps. 

1. Create a Government Gateway Account at the HMRC website and log into your account.
2. Access the VAT registration service to VAT form with automation for small business details.
3. Review and submit the completed VAT registration form through the HMRC portal.
4. Wait for HMRC to process your application and send you your VAT number.
5. Use your VAT registration number to set up an online account
6. Use an online account to submit VAT returns and manage VAT-related activities.

What If a Business Fails to Register VAT When Required?

Failing to register for VAT when required can seriously affect small business audits. The outcomes can range from financial penalties to legal actions disrupting operations. 

• Firstly, fines for VAT registration non-compliance from the Federal Board of Revenue (FBR).
• Secondly, your business may need to pay VAT on all sales from the date they should have registered, along with interest charges.
• Moreover, persistent neglect can lead to court proceedings and potential criminal charges.
• Unable to claim input tax (VAT you have paid on purchases), increasing overall costs.
• Non-registered small businesses can not show VAT separately on invoices. This limits transparency and competitiveness.
• Many government tenders require VAT registration, limiting your bidding opportunities.

VAT Rates and Exemptions

VAT rates can vary depending on the type of goods or services provided. 

The following table details the primary VAT rates and examples of the goods and services that fall under each category. 

VAT Rate	Percentage	Applicable Goods and Services
Standard Rate	20%	Most goods and services
Reduced Rate	5%	Children’s car seat, home energy
Zero Rate	0%	Most food items, books, newspapers
Exempt Rate	N/A	Education, Healthcare Services

In addition to these rates, some items, like statutory fees and fines, fall outside the scope of VAT and are not subject to VAT. 

How to Calculate VAT?

You can calculate the standard rate of VAT on a product or service by using the  following formula:

Amount of VAT = Price × (VAT Rate / 100)

Here:

• VAT Amount is the amount of VAT added to the price.
• Price is the original price of the goods or services.
• VAT Rate is the applicable VAT rate (e.g., 20%, 5%).

VAT Schemes and Charges

Understanding VAT charges and cash accounting schemes can simplify your business’s tax obligations. Additionally, these schemes can also cater to specific business needs and transactions:

Flat Rate Scheme:

This allows businesses with a certain turnover to pay a fixed percentage as VAT.

Marginal Rate Scheme:

Often used for second-hand goods, antiques, and art. As a result, it allows businesses to pay VAT only on the difference (or margin).

Cash Accounting Scheme:

This allows businesses to account VAT on actual payments instead of invoice dates. This improves cash flow management.

Commingling VAT (for online retailers):

It is a practice of mixing VAT from different sources within a business. By:

• Combining VAT from different products or services
• Mixing VAT from different jurisdictions
• Integrating VAT from multiple business units

Reverse Charge: It shifts charging VAT from the seller to the buyer. Specifically, it is commonly used in cross-border transactions and high-risk domestic industries in the UK. Moreover, it helps prevent fraud and simplify compliance.

Penalties for Late or Inaccurate VAT Returns

Late submission penalties operate on a points-based system.

Each late return incurs a penalty point, accumulating until you hit the threshold of 4 points. 

Once you reach the threshold, a £200 penalty applies. Then late submissions while at the threshold will each incur an extra £200 penalty.

Are You Selling to Businesses or Consumers?

HMRC has different VAT rules for Business-to-Business (B2B) and Business-to-Consumer (B2C) sales. Contact us, and we will ensure you’re following the right ones.