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VAT is a tax that many people will have heard of but not necessarily know what it means or stands for. VAT stands for value-added tax and is an additional charge added to most consumer goods and services in the UK. You may see a VAT reference on an invoice from a supplier, or even on a receipt from the supermarket. The standard rate of VAT in the UK for most goods and services is currently set at 20%.
Certain goods and services such as children’s car seats and energy attract a reduced VAT rate of 5%. Other goods and services such as children’s clothes and food have are zero-rated meaning no VAT is charged.
Businesses choose to register for VAT for a variety of reasons; often because it becomes a legal requirement if they turnover more than £85k, or to boost their reputation when trading. When becoming VAT registered, there are two main schemes you’ll need to be aware of:
- The Standard Scheme: – This is where you charge VAT on your sales at 20%. The additional 20% you charge is collected on behalf of HMRC. When you spend money on business expenses that incur a 20% VAT charge, you are able to claim this amount back from HMRC. So the net amount paid to HMRC will be the difference between the amount of VAT collected from sales, and the amount of VAT paid on expenses. This scheme tends to work best when you have lots of expenses that incur VAT.
- The Flat Rate Scheme: – This scheme was set up with small businesses in mind to make the calculation of VAT simple and easy to understand. The clue here is in the name – the scheme offers a flat rate of VAT to be paid back to HMRC based on your total turnover. For instance if your total turnover for the quarter is £15000 and your flat rate of VAT is 16.5%, you would pay HMRC £2475 (15k x 0.165).
You may be considering registering your limited company for VAT, the benefits, and the additional responsibilities it brings. Let’s take a look at this in a bit more detail.
Advantages of becoming VAT registered
- You can charge VAT on all of your sales to customers.
- You get to reclaim the cost of any VAT incurred on your purchases and expenses.
- Any of your customers who are VAT registered can also claim back the VAT charged on your sales.
- Becoming VAT registered could make your company seem more reputable to your customers and suppliers.
- You will be issued with a unique VAT number which you can display on your invoices and receipts. This will be noticed by customers and suppliers who only wish to trade with a VAT registered company.
Things to be mindful of when becoming VAT registered
- Your customers who are not VAT registered will have to pay an additional 20%. Depending on your business model and industry you will need to consider if this will allow you to remain competitive.
- Becoming VAT registered means submitting either monthly or quarterly returns to HMRC. This entails keeping track of all your sales and VAT expenses which can be time consuming and confusing for many. Many businesses will often allocate these responsibilities to an accountant. Here at Cobia, both our Professional and Executive packages include the hassle-free calculation and submission of VAT returns so you don’t have to! Feel free to give us a call or take a look at our website.
Should I become VAT registered?
So now that you have an understanding of how VAT works, you may be asking yourself ‘should I become VAT registered?’
Unfortunately there isn’t a one-size fits all answer as whether you should become VAT registered primarily depends on your personal choice, business model and the industry you’re in. Please do remember that if you’re turning over more than £85k you required by law to become registered. However for most small to medium-sized businesses and contractors, you’ll need to assess things like how much you spend on expenses carrying VAT, and how much being registered will bolster your reputation.
Why not consider joining one of our packages where one of our accountants can walk you through whether becoming VAT registered is for you. Or you may not need a full-on accounting service and just want to get your company VAT registered. For a great one-off price Cobia will promptly get your company registered. Find out more here.