Understanding VAT for small businesses: A beginner’s guide

For small business owners, navigating the complexities of Value Added Tax (VAT) can be a daunting prospect.

Understanding how VAT works, the process of registration, and ensuring compliance are essential steps in managing your business’s finances effectively.

Today’s guide provides an overview of the key elements of VAT for beginners.

What is VAT and how does it work?

VAT is a consumption tax charged on most goods and services provided by VAT-registered businesses in the UK. It also applies to goods and some services imported from outside the UK.

Businesses add VAT to the sale price of the goods or services they sell, which is then paid by the customer. The business then remits this amount to HMRC.

VAT rates

There are three rates of VAT, depending on the goods or services the business provides:

• Standard rate (20%): Applies to most goods and services.
• Reduced rate (5%): Applies to some goods and services, such as children’s car seats and home energy.
• Zero rate (0%): Applies to zero-rated goods and services, like most food and children’s clothes.

When to register for VAT

You must register your business for VAT with HMRC if your VAT-taxable turnover exceeds the VAT threshold over a 12-month period.

The VAT threshold is currently £85,000 but is subject to change, so it’s important to keep updated. You can also register voluntarily if your turnover is below the threshold, which can sometimes be beneficial for your business.

The process of VAT registration

You can register for VAT either online through the HMRC website. You will receive a VAT registration certificate, which tells you:

• your VAT number
• when and how to submit your first VAT return and payment
• your ‘effective date of registration’.

Once registered, you need to start charging VAT on your goods and services.

Keeping VAT records

Accurate record-keeping is crucial for VAT compliance. Under Making Tax Digital (MTD) for VAT, VAT-registered businesses must keep VAT records digitally and file their returns using HMRC-approved software.

These records include:

• supplies made
• supplies received
• time and value of supply for everything you buy and sell
• records of goods you gave away or took from stock for personal use, which need to be treated as sales.

Filing VAT returns

VAT returns are usually submitted to HMRC every three months. This period of time is known as your ‘accounting period.’ The VAT return records things like:

• your total sales and purchases
• the amount of VAT you owe
• the amount of VAT you can reclaim
• what your VAT refund from HMRC is

Please note: All VAT-registered businesses should now be signed up for Making Tax Digital for VAT. You no longer need to sign up yourself.

Tips for VAT compliance

1. Understand your obligations: Be clear about the VAT rates applicable to your products or services and comply with the VAT threshold rules.
2. Maintain good records: Keep detailed and accurate digital records of all your VAT invoices and receipts.
3. Submit VAT returns on time: Late submission can result in penalties.
4. Stay informed: VAT regulations can change, so it’s important to stay up-to-date.

In conclusion

Understanding and managing VAT is a critical aspect of running a small business.

While it may seem overwhelming at first, with a bit of research and perhaps some professional advice, it becomes a manageable part of your business operations.

Ensuring you are compliant not only avoids penalties but can also provide significant benefits to your business. Remember, staying informed and organised is key to successfully managing your VAT responsibilities.

Stapletons are able to guide businesses step-by-step throughout the registration process, all the way through to the compliance of submitting their returns.

In our approach to bookkeeping, we cater to the diverse preferences of business owners. Whether you prefer using software solutions such as Xero or QuickBooks, or if you’re more comfortable with spreadsheets or other methods, our team is equipped to offer the necessary guidance and support.

Any questions? Contact us today.