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VAT and the Small Business

By: Dave Howell - Updated: 12 Aug 2013 | comments*Discuss
Vat Input Tax Output Tax Rates Of Vat

Every time you make a purchase for your business you are likely to pay VAT on the goods or services you have bought. All businesses that turnover more than £64,000 must register for VAT and start to collect this from their customers. However, if your business doesn't turnover this much yet, you can still register for VAT if you buy lots of goods or services that you have to pay VAT on. Your voluntary registration will mean you can claim back the VAT you have paid.

VAT is divided into two taxes:

  • Input Tax
  • Output Tax

When you have VAT on any goods or services your business buys, you are paying input tax. When you charge VAT on any goods or services your business sell, this is output tax. Remember that it's a legal requirement to register for VAT when your business reaches the VAT threshold. Failure to do this could mean severe penalties. You can read a complete and detailed overview of VAT in Notice 700 on the HMRC website: http://tinyurl.com/2jjarr.

Many businesses prefer to hand their VAT accounting to a specialist agent that have experience in how to handle VAT, and more importantly, ensure that your business is paying the right amount of VAT each year. You and your agent must be registered with the HMRC. You can download the form you need to register your agent to handle your VAT return from the HMRC website: www.hmrc.gov.uk/forms/64-8.pdf. If you want to handle your own VAT returns, you can register for VAT on the HMRC website that includes details of how to register online: HMRC VAT returns.

Rates of VAT

When you are looking at if you should register your business for VAT you need to evaluate the VAT position of the goods or services your enterprise sells. At the moment there are four basic VAT rates:

  • Standard Rate VAT [17.5%]
  • Reduced Rate VAT [5%]
  • Zero Rate VAT [0%]
  • VAT Exempt

The goods or services your business sells will fall into one of these categories, but you must understand that zero rated VAT is not the same as VAT exempt. The difference comes into play when your business supplies VAT exempt goods or services. If this is the case in your business, you can't register for VAT and claim back the VAT you have been charged on your purchases.

Also, some businesses buy goods that are exempt from VAT to make new items that do attract VAT. In this case your business is what is called partially exempt. You can arrange with the HMRC a method to calculate how much your VAT liability will be in these circumstances. You can read more about partial VAT exemption on the HMRC website: www.hmrc.gov.uk/briefs/vat/brief2307.htm.

VAT Hints and Tips

Handling VAT shouldn't be a drain on your businesses time and resources. With proper planning and the aid of VAT specialists you can handle your business's VAT affairs with ease. The HMRC have a VAT beginner's guide that all businesses should read if their turnover is approaching the VAT threshold. You can view the VAT beginner's guide on the HMRC website: http://tinyurl.com/74cul.

Use the hints and tips below to help you navigate VAT with the least amount of stress and frustration:

Register in Time
Your business must monitor its turnover carefully to ensure that when it passes the £64,000 threshold, it is registered for VAT. If you are unsure, contact the HMRC helpline on: 0845 010 9000 for more information.

Get Expert Advice
VAT can be a complex tax to collect and claim back, so use your accountant and any tax agent you want to appoint to help you ensure your records are up-to-date.

Face Any Problems
The amount of VAT that your business may have to pay could be quite high. If your business is running into difficulty and may have problems paying the VAT it owes, talk to the HMRC as soon as you can. They can help you manage your payments.

VAT and Your Cashflow
Business owners often focus on the VAT that they pay and don't consider the VAT they can claim back in their overall cashflow. If you are expecting a refund of the output tax you have paid, factor this into your business's cashflow.

Complain if You're Unhappy with a Decision
VAT like any other tax has to be calculated. If you or your tax advisor believe a mistake has been made make a complaint as soon as you can. There is a well-established complaints procedure you can use. You can download a factsheet that gives details of how to complain from the HMRC website:www.hmrc.gov.uk/factsheets/complaints-factsheet.pdf.

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