You’ve likely heard the term “VAT threshold” thrown around if you’re a business owner. But what exactly does it mean?
VAT can sometimes seem like a daunting prospect, especially if your business is skirting close to the VAT threshold. In this blog, we’ll talk about VAT and what to do if you do go over it.
So, what is the VAT threshold?
The VAT threshold refers to the level of taxable turnover at which a business must register for Value Added Tax (VAT). It’s an important concept to understand, as failing to register for VAT when required can result in penalties from HM Revenue & Customs (HMRC). In this blog post, we’ll explore what the VAT threshold is, how it works, and what you should do when you reach it.
The term ‘taxable turnover’ refers to the amount of business sales that should have VAT charged on them. Some items, such as childrenswear, certain types of food and insurance are not taxable under VAT – the full list of VAT-exempt items can be found here, so these types of sales won’t count towards the VAT limit.
Our accounting team at Freedom In Numbers understands that value-added tax (VAT) can be a complex and overwhelming topic for many business owners. This is especially true when a business exceeds the VAT threshold, which currently stands at £85,000 in annual turnover. It is an outstanding achievement for your business to get to this level of turnover, and you should be proud of reaching this milestone! However, knowing that this comes with additional tax responsibilities is essential.
Once your business reaches this amount of turnover, you are legally required to register for VAT and start charging VAT on your products or services. Going over the VAT threshold is seen as a sign of success for a business, but it also brings additional paperwork.
Here are some tips from our accountant team on handling VAT in a tax-compliant and efficient way to steer your business through the milestone of meeting the VAT threshold:
Register for VAT
The first step for any business that goes over the VAT turnover threshold is to register for VAT with HMRC. This can be done online, and the process is relatively straightforward. However, if you are unsure about how to register or have any questions about VAT, it’s always best to speak to an accountant who can guide you through the process.
Once registered, you will receive a VAT registration number, which you will need to include on your invoices and any other VAT-related paperwork.
Choose the right VAT scheme
When your business goes VAT registered, you must let HMRC know how to account for the VAT you charge and pay. This is where VAT schemes come in; these are different methods of recording and reporting VAT for your business. Several VAT schemes are available, and choosing the best one for your circumstances is important, as every business is different. The most common VAT schemes are:
Standard VAT accounting: This default VAT scheme requires businesses to submit VAT returns quarterly based on invoices issued and received during that period that will automatically apply when you register for VAT. This method is calculated using the VAT included on the invoices you send to your customers, less the VAT you paid to your suppliers.
Cash accounting: This scheme allows businesses to account for VAT based on payments received and made rather than based on invoices issued and received. This can be beneficial for companies that have cash flow issues.
Flat rate VAT: This scheme allows businesses to pay a fixed rate of VAT on their turnover rather than on the VAT charged on invoices issued. This can benefit businesses with low costs and those who are not eligible for VAT reclaims.
Annual accounting: This scheme allows businesses to make advance VAT payments throughout the year rather than quarterly. This can benefit companies that prefer to pay their VAT in smaller, regular instalments using payments on account.
Each scheme has advantages and disadvantages; our VAT experts can help you decide which VAT scheme is right for your business if you need help.
Keep accurate records
Once registered for VAT, you must keep accurate records of all transactions involving VAT. This includes invoices issued and received, credit notes, and other VAT-related paperwork. HMRC can request to see these records at anytime, so keeping them up-to-date and well-organised is crucial. You must also ensure that your VAT returns are accurate, as errors can result in fines and penalties.
Claiming VAT back
Once registered for VAT, you can claim back the VAT you have paid on purchases related to your business. This includes things like office rent, equipment, and supplies. However, you must ensure that the purchases are eligible for VAT reclaims and you have the necessary paperwork to support your claim.
Seeking professional advice and help
Navigating VAT can be challenging, and it’s always best to seek professional advice from an accountant.
Engaging an experienced accounting firm to manage your VAT affairs can bring numerous benefits to your business. Firstly, getting support with your VAT accounting can ensure you fully comply with VAT regulations, reducing the risk of penalties and fines. A VAT accountant can also advise on the most tax-efficient VAT schemes for your business, helping you to save money. In addition, an accounting firm can take the administrative burden of VAT off your shoulders, allowing you to focus on running your business.
By partnering with experienced accountants, you can have peace of mind that your VAT affairs are being handled by professionals who understand the complexities of VAT and can provide tailored advice to your business.
Our team at Freedom In Numbers can help you with the following:
- Register for VAT
- Choose a suitable VAT scheme
- Keep accurate records
- Ensure that your VAT returns are correct
We can also help you maximise your VAT reclaims and minimise your VAT liability. Contact our team today to get the help you need with your VAT compliance.