Small Businesses: VAT-related FAQs

Small Businesses: VAT-related FAQs

Small business and start-ups have lots to think about regarding their operations, especially when it comes to VAT and related issues. For that reason, we have compiled a list of the most frequently asked questions, answered by our experts in a simple fashion saving difficult-to-understand jargon.

Q: Should I register for VAT?

A: Registering for VAT or not is a common concern among small business owners, who also have questions regarding the VAT Threshold. Generally, if your total sales or turnover in the previous 12 rolling months (not calendar year) exceeds the current compulsory registration threshold, then you have to register. Otherwise, you will be called to pay fines. That aside, you can still register (voluntarily) if you so desire, even if you haven’t exceeded the compulsory registration threshold.

Q:  How does VAT work?

Every VAT registered business is an unpaid tax collector. This means that you are obliged to add the appropriate VAT rate (usually 20%) to everything you sell. The additional income that comes from adding VAT is not yours. You are just collecting it on behalf of HM Revenue & Customs or HMRC.

When you buy products from another VAT-registered organisation, you are charged with VAT that you can claim back. Let’s assume that you have collected £1,000 in VAT from your customers in the past 3 months, and you have also bought an item from a supplier and you have been charged with £240 (£200 + VAT). You will have to give to HRMC the amount of VAT you have collected (you may also hear it referred to as Output VAT) minus the VAT you paid to your supplier (often called Input VAT). At the end of the day, you will have to pay £960 £1000-£40=£960.

Q: Is there any other reason I should consider registering for VAT?

To put it simply, for the image. If you are OK with letting the world know that you are making less than the current threshold of£82,000, then don’t register. However, statistics has shown that VAT registered startups and organisations attract more customers and are regarded established companies, just because they have chosen to register for VAT.

Q: Are there any downsides?

A: Indeed, there are. Most business owners are intimidated by the enormous paperwork required to register for VAT. However, with a decent accounting software or a trusted accountant, you won’t have any issues. Overall, the registration process is usually completed within four working days.

Q: What about the various VAT Schemes available?

A: If you decide to register for VAT, there are many types of schemes available. The three most popular are:

(1) Accrual (or Standard) Scheme

The date of your invoices defines the amount of VAT you reclaim or owe. A calendar year is divided in four quarters. The VAT you own to HRMC will always be deemed at the end of the quarter in which your invoice is dated. This is where trouble comes in because it can cause cashflow issue for start-ups of small businesses.

(2) Flat Rate Scheme (FRS)

In certain industries, FRS can save a lot of money because you are provided with a flat-percentage rate, based on the industry you are in. Then, you charge VAT at the standard rate but you pay over to HMRC the flat-percentage rate (say, 11%) of your Gross turnover*. However, although you get to keep some of the VAT you receive, you cannot claim back any VAT on your purchases, though.

*Gross turnover includes VAT.

(3) Cash Accounting Scheme

Any cashflow problems that you may face with the Standard scheme are resolved if you opt for the Cash Accounting Scheme. Same as in the Standard scheme, the amount of VAT you owe or reclaim depends on the date of your invoice.

Q: What is VIES?

A: The Vat Information Exchange System (VIES) is an electronic means of sending and receiving information related to the validity of the VAT-numbers of EU-registered companies, as well as information regarding tax exempt intra-EU supplies between EU member states administration.

The information is obtained by the national administrations and is then fed into national databases. Note that all data is real-time. This means that every time you make a (simple) request, a message is automatically sent to the EU Member State that issued the VAT ID number and asks if the number you have quoted is valid. Basically, this is all the information available.


For more on VIES and what to do if a number is invalid, check out our next article!

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