VAT - Register or not to register! that is the question?

Micky_d

Hi all,

I am launching a new business and predict that sales will breach the VAT threshold after about 8-9 months (hopefully). My business adviser has suggested that I register for VAT from day 1 instead of waiting until later in the year and having to build VAT into my prices.

I am a little confused as to the benefits of this. Could anyone point me in the direction of 'VAT advice for dummies'. I would like to understand what VAT is charged on and at what rate (other than the standard 20%) also how to claim VAT back on purchases.

Everything I read seems to very complicated. I understand that there used to be courses by HMRC to help with VAT but apparently these no longer exist.

Also, could anyone who has done this let me know the most cost effective way to manage paying the vat. I have heard that the VAT man is ruthless so I don't want to get this wrong.

Cheers

HappyMJ

I would register from day one so that you can claim the 20% back on everything you buy. VAT is charged at 20% on almost everything you sell with a few exceptions.

The most cost effective way to manage it is with a software program that keeps a track of all your spending and receipts.

If you buy something at £100 plus £20 VAT and sell it at £200 plus £40 VAT then you forward £20 to the HMRC on your VAT return. You would also have a lot of other expenses and the software will figure it all out for you.

They aren't ruthless if you get it correct.

JasonLVC

Whether to register for VAT will depend upon what you sell and to whom.

if your sales are business-2-business only then it likely makes sense to register for VAT straight away. As your customers are other businesses then they are likely to be VAT registered and can reclaim their VAT so the extra 20% VAT charge on your costs is irrelevant to your customers.

if however your sales are mainly to consumers (ie, ebay, amazon, markets, web sales, etc) then being 20% more expensive than your competitors may damage your sales so you need to take a more mathematical decision as to whether registering for VAT will be of use to you or not.

Generally if selling to consumers its best to not register for VAT until you have to, unles the items you are selling are very expensive (ie, solar panels, computers, etc) becuase then you will be buying goods in which will have a lot of VAT on them with no means of recovering this VAT unless you yourself register for VAT.

The other thing to factor in is what kind of input tax you will incur. input tax is the VAT on your purchases/expenditure. if you're working from home or have very low overheads then it may not be worth registering if you have little to reclaim, if you have a lot of overhead costs (rents, stock, etc) then registering may be more beneficial.

So, what are you selling - goods or services?

Who are you selling this to - consumers or other businesses?

What sort of overheads will you have - big or small?

over to you.....

paulwf

Micky_d wrote: »

Also, could anyone who has done this let me know the most cost effective way to manage paying the vat. I have heard that the VAT man is ruthless so I don't want to get this wrong.

Cheers

The problem arises because in most cases businesses pay VAT once a quarter so it can be quite a big chunk to pay. Like anything to do with cashflow it seems easier to find money for a small weekly payment than a large quarterly one.

A business bank account will usually actually comprise of several accounts, there should be a "savings account" where you can move money across from the current account at will. Try and move some money across weekly and don't spend it!

A book keeper or accounts software can give you a running total for VAT or you can do a rough calculation if most things you buy and sell incur VAT. After a while you'll soon have a good idea of what your VAT bill is likely to be, it might be as simple as putting £100 (for example) aside every week, if you estimate on the high side anything left at the end of the quarter is a bonus

dancingfairy

There are various schemes to make life easier for the small business. For example there is the flat rate scheme - basically this is a set rate of VAT that you charge depending on what industry you are in (this saves having to work out how much you have to charged the customers and then trying to work out how you can reclaim and then working out the difference) and you just pay that flat rate to HMRC, so if the flat rate for your business was 10% then you just work out 10% of your sales and pay that over.
Another scheme is the cash accounting scheme - this is where you pay tax based on when (if ) you receive cash, rather than on invoices for work done - basically it means you only pay tax on cash you've actually received, rather than having to pay it when you've invoiced for it and then having to reclaim it back if the customer doesn't pay you.
Another scheme that is probably the most useful is the scheme where you pay in installments. As far as I understand it - you estimate how much tax you will have to pay over a year and then pay in either quarterly or monthly installments to make budgetting that bit easier. Obviously just after the end of your tax year you have to double check and then just pay the difference (which is hopefully small if you have done it right).
Hope that helps.
df
P.S Your accountant should be able to help you out - just make sure you keep good records. Also if you appoint a good bookkeeper/or can learn the basics yourself pretty quickly then this again will save you on accountants fees.

isplumm

dancingfairy wrote: »

There are various schemes to make life easier for the small business. For example there is the flat rate scheme - basically this is a set rate of VAT that you charge depending on what industry you are in (this saves having to work out how much you have to charged the customers and then trying to work out how you can reclaim and then working out the difference) and you just pay that flat rate to HMRC, so if the flat rate for your business was 10% then you just work out 10% of your sales and pay that over.

df
.

Hi,

I am on the Flat Rate Scheme - I charge my customers 20% VAT, but pay about 15% VAT. It varies depending on what kind on business you run - remember it is 15% on the gross - not you don't make that much.

Another important point to note is that you can not claim VAT back (unless buying something over £2k) ... so it is mainly good for companies who tend not to buy a lot .... but no keeping receipts etc. very easy to do.

Mark

Pennywise

isplumm wrote: »

but no keeping receipts etc. very easy to do.

But proper book-keeping and keeping receipts is still needed for tax returns, so the flat rate VAT scheme doesn't take away the record keeping requirements for income tax/corporation tax.

isplumm

Pennywise wrote: »

But proper book-keeping and keeping receipts is still needed for tax returns, so the flat rate VAT scheme doesn't take away the record keeping requirements for income tax/corporation tax.

Agreed - just trying to suggest that the Flat Rate Scheme is a quick & easy method of paying VAT.

Mark

LianneCarlaS

If you are B2C then you could build VAT into your prices to begin with and then when you do need to register you can simply absorb the cost.
eg. rather than charging £100 and then having to tell your prices that the price is £120 when you become registered. You could charge £120 from the start and then when you register for VAT your customers still pay you £120 but you then send £20 of it to the tax man.

As for cash flow you can pay the VAT monthly based on an estimate of the amount due. This is on the annual accounting scheme which means you only produce one return a year

jm2926

I have been in this situation and left it until close to threshold to register. On registering you can claim for goods purchased previously which you still have, and services. The timescales when I did it were 4 years for goods and 6 months for services from date of registration.

So the first vat return was 3 months later, and I claimed back VAT on assets, stock (did a stock take on registration day), rent etc and this was offset against VAT charged to customers during the 3 months since registering, resulting in a situation where I was owed VAT back.

As it was the first submission, the VAT office contacted me and asked for 20 or so purchase receipts to be sent, along with the full VAT breakdown from SAGE. He sent a nice cheque back

Edited to add - I sell to consumers and the prices didn't change much, just sanity checked them to ensure margins were correct. It effectively meant the margin was higher pre-registration. That is the whole point of the threshold to provide a toe hold for small or new businesses to get started.

http://www.hmrc.gov.uk/vat/start/register/purchases-before.htm

Micky_d

Hi, thanks to you all for the advice. I think I will register from the off. Inow have a cashflow and account software package that calculates Vat so this will help. Also, I have spend a fortune on set up costs with computers/ equipment etc so would have rather a lot to calim back initially. Really great advice