VAT is one of the most critical areas of business tax you need to get right. It can be a massive challenge in terms of accounting, but it can also even impact your profit margins and your competitiveness. Thus, managing VAT is a vital component of running any successful business – it’s not only about keeping HMRC content.
Value-added tax, abbreviated as VAT, is a tax imposed on goods and services charged at the sale. The standard rate of VAT is 20%. However, there are other rates levied on some products and services.
As a business, most of the goods and services that you purchase from suppliers will have VAT included in the price. Moreover, you might also have to charge VAT from your customers.
Why Should You Register Your Business for Vat?
If your turnover is higher than £85,000, you have to register for VAT as per the law. However, you can also opt for voluntary VAT registration.
Registering allows you to claim TAX on your purchases. If you pay more VAT than what you collect from your customers, reclaiming it makes up the difference.
Another reason for registering for VAT is that another business might want to do business with you. It gives the impression that your company is more established and bigger even when you are just starting.
Conversely, VAT registration translates to increased paperwork, and in some cases, you will pay more to HMRC (if you collect more VAT from customers than what you pay).
When Should You Register?
It is compulsory to register for VAT when:
- Your company had a turnover of over £85,000 in the past 12 months.
- You foresee that your turnover will exceed £85,000 in 30 days.
Keep in mind that these are calculated on a rolling basis. Thus, it’s not enough to assess your yearly taxes and register if your income has surpassed the threshold. You will have to keep an eye on your rolling 12-month and 30-day periods and register timely.
What Records Do You Need to Keep?
Just like maintaining records for the HMRC, you have to be careful about VAT recordkeeping. You have to record all your business transactions and keep documents such as receipts, bills, cheque stubs, and bank statements to back them up. You also have to separate your finances from your business transactions.
For VAT-related purposes, you should maintain a record of all the supplies you manufacture and receive, along with a VAT summary for every tax period covered by your tax returns. Your records should be easy to find and up to date. Plus, if you register for VAT, you need to maintain your six-year records.
Registering for VAT can save your business money. Some opt for voluntary VAT registration before reaching the limit. Moreover, recent changes to the law mean that VAT returns are getting simpler.
We can help
Accurate Bookkeeping Saves Tax. It is essential to prepare your business in advance. Vat is a complex area of tax and in this article, we have only been able to touch on some of the issues involved. If you think you are likely to be affected by these changes or want to know more about Bookkeeping, Vat, Contact us. We can work with you to ensure you are well prepared.