What is VAT and How Does It Impact Your Small Business?

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Value Added Tax is something every self-employed person and small business should understand, because even if you’re not earning enough to be VAT-registered by law, doing so voluntarily may benefit your company.

If you’re unfamiliar with how VAT works for business, this can lead to incurring financial penalties from HMRC, including when you've made a genuine mistake, as ignorance of the law is no defence.

What is VAT and how does it work?

VAT is a form of tax on almost all goods and services in the UK. When a self-employed individual or small business is registered for Value Added Tax, they can benefit in two ways. First, you can charge VAT on the goods and services that you sell; and secondly, you can also claim back VAT on goods and services you’ve purchased for your business.

When is the VAT threshold required for registration?

If a small business’s taxable turnover exceeds £90,000 in a 12-month period, it must register for VAT. This is a legal obligation to HMRC. However, businesses can also register voluntarily if they choose to do so, regardless of turnover.

Different schemes are available for SMEs including the Standard, Flat Rate, Cash Accounting and Annual Accounting plans, each of which has varying requirements and advantages.

New businesses, or those who are unfamiliar with how it works, may benefit from commissioning professional accounting and tax services in Cornwall to avoid pitfalls. The way your bookkeeping is managed can impact cashflow, as you’re required to pay VAT on purchases, even if your customers haven’t yet paid, so the timing can affect the liquidity of your finances.

Voluntary registration

Choosing to register means you don’t have to worry about your business’s turnover exceeding the VAT threshold for the first time, as you will be registered already and won’t incur a financial penalty. It can also improve your brand’s profile, as it gives the impression you’re running a successful and professional company. Some organisations and suppliers won’t work with firms who aren’t VAT-registered.

Once you register, claiming back VAT on the goods and services you’ve purchased for your company can be an advantage. It’s possible to reclaim on these types of expenses even if they were incurred prior to starting your business, as long as you still have receipts and have used the goods exclusively for professional purposes.

Common VAT mistakes

Failing to register for VAT on time, not keeping adequate records of VAT transactions, or miscalculating VAT on sales and purchases are all errors that can lead to penalties from HMRC. The tax office may conduct a Civil Evasion Tax Investigation if it has reasonable grounds to believe a company is evading tax deliberately and is empowered to impose a civil penalty equal to the amount of avoided VAT.

Process for registering

There are several different methods for registering including online, by post or through your accountant or financial advisor. If you choose an accountant, Cornwall has the best professional team in Saint Austell and Newquay. Operating for more than 15 years, DL Accounts can provide expert guidance every step of the way.

Most businesses register online through a Government Gateway account, according to data from HMRC, but if you’re unsure how to go about things, we can assist to ensure your company is compliant with the law.

We can assist businesses by offering expert guidance on registration, scheme selection and compliance management, helping companies to avoid common mistakes and ensuring they stay up to date with changing VAT regulations.

Penalties for non-compliance

The penalties for failing to comply with VAT regulations, on top of having to pay the money owed to HMRC, include an additional fine, equating to a percentage of the due VAT. This can vary, depending on how late it is. The later the payment, the higher the fine!