What is VAT, and do I need to register my company?

Almost every consumer in Britain pays it, and it’s a staple talking point during the Chancellor’s annual budget. But what exactly is VAT and do you need to register your limited company for it?

What is VAT?

As consumers, we’re most likely to come into contact with VAT when we hit the shops. But, as a limited company owner, there’s much more to think about.

VAT is a registration-based tax, which means you’re only allowed to charge it if your business is signed up to the scheme. All sorts of items are eligible for VAT, and the main group is “business sales” – which includes most items or services you sell to customers or clients.

You can also charge VAT if you sell off business assets, sell goods or services to your staff (such as lunchtime meals), and more.

The advantage of being VAT-registered is that you can claim back any VAT which your business pays on the goods and services of other businesses.

What VAT schemes are available?

VAT can be a bit of a minefield sometimes, especially if you’re setting up in business for the first time.

One of the complexities of the system is the wide range of payment schemes on offer. When it comes to VAT, it’s not always as simple as tallying up what you owe then deducting what you’ve paid.

Instead, there are a number of different schemes from which you can choose, each with different payment terms.

For example, the VAT Flat Rate Scheme offers you the chance to pay a fixed percentage of VAT to HMRC each quarter. The percentage is based upon the type of industry you are in.

This scheme was invented to simplify the VAT tasks of small business owners, but if you are a ‘limited cost trader’, i.e. you have very few expenses, from April 2017 the tax advantage offered by the FRS has been removed.

If the thought of submitting a VAT return every quarter fills you with dread, the Annual Accounting Scheme may be for you. Instead of four payments a year, you can simply submit one a year and make advance payments based on what you paid last time.

Or if your invoices have a long payment period, the Cash Accounting Scheme could be a good idea. This system allows you to pay your VAT to HMRC only when you get paid by customers instead of when you invoice them, which means you won’t have to stump up cash which hasn’t yet arrived.

This is a popular option for many small company owners (ourselves included).

Finally, the VAT retail schemes give retailers a chance to cut down on the amount of time spent calculating VAT by letting them simply work it out once per VAT return, rather than on every single sale.

The Direct Calculation scheme, for example, means you can pay one rate of VAT on some of your sold goods while paying the majority at another – rather than break it down every time a customer comes through the door.

If you’re unsure about which VAT scheme is most appropriate for your business, we recommend you talk to an accountant who will be able to help.

How to register your company for VAT

It’s possible to register for VAT online, and this is usually the easiest way. Or, more likely, you will hire an accountant to do this on your behalf.

Once you’ve registered, you’ll receive a VAT number. You can then pass on this information if you’re employing an accountant to manage your VAT affairs for you.

When you register, you’ll be required to give information such as your bank details, your company’s turnover, and more.

It’s mandatory to register for VAT if your total VAT taxable turnover (all items you sell which aren’t VAT exempt) is over £85,000 during a 12 month period, or if you believe that you’ll earn more than this amount during a 30 day period (2023/24 tax year).

In addition, you’ll also have to register if you buy goods worth a total of over £95,000 from suppliers who are VAT-registered in the European Union, even if the goods you sell are VAT-exempt.

Also, it’s important to remember that you may have to re-register for VAT if you begin running a business which was previously registered under another owner.

You can register for VAT even if your turnover hasn’t crossed the prevailing threshold. You may benefit from offsetting the VAT on company purchases, for example. Furthermore, you may feel that being VAT registered makes your company look more professional – in the professional services industries particularly.

How to cancel your VAT registration

There may be reasons why you no longer want your company to be VAT-registered.

You can elect to cancel your registration for any reason, as long as your annual turnover is beneath the current compulsory de-registration threshold of £83,000.

Or, you may need to de-register if you are closing down your company.

There are two ways to re-register for VAT. You can cancel your registration online. Or you can manually fill in form VAT 7 and post the form to HMRC. Find out more about your options here.

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