The Small Business VAT Guide

Last updated: 14 July 2020

Estimated reading time: 5 minutes

VAT is one of those taxes that you generally accept and think very little about – until you start a business. All of a sudden you have lots of questions about VAT. What exactly is it? When do you need to start charging VAT? And when do you need to start paying VAT? This small business VAT guide is designed to answer all your VAT queries.

Jump to:

  1. What is VAT?
  2. At what point do small businesses pay VAT?
    1. When do I need to register my business for VAT?
    2. Should I voluntarily register my business for VAT?
  3. How do I register for VAT?
  4. Do I charge VAT on products and services sold abroad?
  5. How could Brexit impact VAT procedures?
  6. Altering your business contracts to reflect possible post-Brexit VAT rules

What is VAT?

VAT is an acronym that stands for Value Added Tax. VAT is a tax that is added to the price of certain goods and services, it was introduced when the UK joined the European Economic Community (EEC), the precursor to the EU, in 1973.

In the UK, VAT is set at 20% for most goods and services. If what you are selling is eligible for VAT, you add 20% of the price of the product to its price tag. So, if you set the price of a pair of shoes you are selling at £100, you add £20 VAT on top of this price and the actual selling price becomes £120.

Some products and services are eligible for a reduced rate of VAT. To encourage uptake, VAT is set at 5% for certain energy-saving products, for example. And there are a few items that are exempt from VAT. For instance, you do not need to charge or pay VAT on children’s clothes.

Here is the government’s list of VAT rates for different products and services, plus details of which items are exempt from VAT.

At what point do small businesses pay VAT?

Not all businesses pay VAT or have to charge VAT on the goods and services that they sell. You can only charge VAT if you are registered for VAT.

When do I need to register my business for VAT?

If the total of all the goods and services that you sell that are eligible for VAT, goes over £85,000 over the last 12 months or if you expect it to in the next thirty days, you must register your business for VAT, it is a legal requirement. You can also voluntarily register your business for VAT if you don’t reach this threshold, however.

Should I voluntarily register my business for VAT?

Many businesses with a VAT registered turnover of under £85,000 voluntarily register for VAT, this is because there are some benefits to be gained from doing so.

  • Being VAT registered can give the illusion that your business is more successful than it is, because most people will think that your turnover has gone over the £85,000 threshold. Having your VAT registration number displayed, as it should be, on your website, stationery, and emails, also may make your business appear more professional. Being VAT registered may also help you attract talent, win business, and build relationships with suppliers. Some businesses will only deal with other businesses who are VAT registered.
  • As well as adding VAT to all the goods and services that you sell, you can claim back the VAT on any goods and services that you purchase for use in your business, such as machinery or computer support.
  • If your VAT registered turnover is hovering just below the £85,000 threshold, and you voluntarily register for VAT, you won’t get caught out if you should go over that threshold without notifying HMRC within the thirty-day notice period.

There are also some disadvantages to voluntary small business VAT registration, however, so you need to think carefully before signing up.

  • If you work with or plan to work with a lot of very small firms who are not registered for VAT themselves, to help keep costs down they may prefer to work with other small companies that are not VAT registered. Your VAT registration could lose you their custom.
  • The VAT bill is one extra bill to pay.
  • Small business VAT registration means additional paperwork. You will have to keep a log of all your VAT receipts and invoices and file VAT returns every quarter. Plus, if you use an accountant it will entail additional accountancy costs. If you don’t, filing your own VAT return is a time-consuming task.

How do I register for VAT?

You can register for VAT online. You will need to create an online VAT account through your Government Gateway account. As part of your application you will need to reveal your turnover, business activity and bank details, so have all this to hand.

Once registered you can submit your VAT returns online. You should receive your VAT registration certificate within thirty working days. You will be liable to pay HMRC any VAT due from your date of registration. You can appoint and authorise an accountant to submit your VAT returns for you or you can do this yourself.

Do I charge VAT on products and services sold abroad?

VAT is not chargeable on exports to countries outside of the EU, but it’s important that you keep evidence of these exports so that you can prove that VAT didn’t apply.

Up until the end of the Brexit transition period, when you sell goods to someone in an EU country who is not VAT registered, you charge VAT in the same way that you would to a UK purchaser. When you sell goods to a VAT registered EU purchaser you apply a zero rate of VAT.

It is a little more complicated when it comes to charging VAT on services supplied to an EU country; there are some instances where you may have to register for VAT in that country.  It’s best you take the advice of a specialist VAT accountant to see how this impacts your particular circumstances. Once the UK leaves the EU, the VAT position may change, however.

How could Brexit impact VAT procedures?

As VAT was introduced as part of the UK’s obligations to the EEC, which went on to become the EU, VAT could technically be abolished at the end of the Brexit transition period. This is unlikely to happen, however, as it’s a very good revenue earner for the treasury.

As the details of any Brexit deal are still to be agreed and a No-Deal Brexit remains a distinct possibility, the extent to which Brexit could impact VAT procedures for UK companies is still uncertain.

In the event of a No Deal Brexit, there will be a hard border between the UK and the EU, and UK traders will need to fill out customs declarations when they import and export goods to the EU and they will be liable to pay import VAT and customs duties. While the EU will apply its own customs regulations, duty and VAT to goods coming into the EU from the UK. Speak to your accountant about how a No Deal Brexit could impact on your European trade.

Altering your business contracts to reflect possible post-Brexit VAT rules

If a Brexit deal is agreed and it results in VAT changes or if there is a No-Deal Brexit, you will need to adapt your business contracts to reflect the new VAT procedures. Harper James’ team of commercial solicitors is ready to advise you on all of the different small business VAT scenarios that Brexit could bring and they can ensure that your contracts are updated accordingly.

What next?

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