VAT for Small Business - Beginner's Guide

A Small Business Beginner’s Guide to VAT

We’ve written a beginner’s guide that answers all the essential VAT related questions you might have if you’re thinking about starting your own business. What is VAT? How does it work? And most importantly, should you register your business for it? 

What is VAT?

Value Added Tax is a tax added to most goods and services by the companies that provide them. It is a large source of revenue for the government, and was introduced back in 1973.

How does VAT work?

As a small business you can only charge VAT if you’re VAT registered (more on this below). It’s charged on any goods or services sold or hired out, and also applies to any business goods used for personal reasons.

All of these items can be collectively referred to as ‘taxable supplies’. If you need a more detailed list of exactly what is and what isn’t a taxable supply, head over to HMRC’s dedicated page on this. There’s a ton of information available, presented in a clear, easy to read format.

Do I need to register my business for VAT?

If your annual turnover exceeds £82,000 (the current threshold), you must register for VAT within 30 days of reaching this number. The threshold does not include capital assets (eg. buildings or vehicles), or any exempt supplies. Again, if you’re unsure what counts, HMRC has another rather excellent dedicated page that tells you everything you need to know.

If you want to register for VAT, by far the quickest and simplest way is to do it online. We’ve got another guide on the best VAT scheme for your business if you need some help deciding.

Should I register for VAT, even if I don’t need to?

This is a valid question, and of course there’s no right or wrong answer. But from a business image perspective being VAT registered can certainly prove beneficial. Some businesses only deal with VAT registered suppliers. And on top of that, if you’re not registered, you’re essentially advertising the fact that your annual turnover is under £82,000.

What are the benefits of registering VAT?

Believe it or not, being VAT registered can actually save you money! Because as a VAT registered business you can charge VAT on everything you sell. And your suppliers do exactly the same when you buy something from them. But you can claim the money back!

Confused? Let’s look at an example.

Imagine you collect £1,000 worth VAT from sales during a three month period. For this same quarter you also pay £100 worth of VAT on goods you buy. The £1,000 you collected is referred to as Output VAT, and the £100 of VAT you paid is known as Input VAT.

As a VAT registered business, you only pay HMRC the Output VAT minus the Input VAT. In this example it’s £900 (the £1,000 minus the £900), so you can pocket the extra £100 difference!

However, the balance does swing both ways. So if you receive more VAT from sales than you pay on purchases (eg. the difference between Output VAT and Input VAT is negative), you’ll need to pay HMRC the difference. It can be that the money saved from one payment is neutralised by a surplus payment the next time.

Are there any downsides to registering VAT?

As with all business admin, registering for VAT comes with a heap of extra paperwork. You’ll need to provide HMRC with regular updates on your business’ finances. It could mean doing tax returns as often as every quarter.

Another deciding factor should be your customers. If the majority of them are VAT registered businesses, then they’ll be able to offset the cost of the VAT you charge them (as outlined in the example above). But if you sell mainly to consumers then your prices, with a VAT mark up, may prove too expensive. Unlike businesses, they’re not able to reclaim VAT.

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