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VAT – An overview for small businesses

Value Added Tax (VAT) is an integral part of the tax system, affecting businesses of all sizes.

For businesses registered for VAT, the process of filing VAT returns and reporting can often be seen as complex and overwhelming.

However, with the right knowledge and understanding, businesses can simplify this process and ensure compliance with HM Revenue and Customs (HMRC).


VAT registration

If your business’s taxable turnover exceeds the VAT registration threshold (currently £85,000 in the UK), you must register for VAT with HMRC.

Registering voluntarily can also be beneficial if your turnover is below the threshold but you wish to reclaim input VAT on business expenses.

The registration process can be done online through the HMRC website, and you will receive a VAT registration number upon approval.

Choosing the right VAT scheme

Once registered, you will need to decide on the most suitable VAT scheme for your business.

The two primary schemes for small businesses are the Standard VAT scheme and the Flat Rate VAT scheme.

Standard VAT scheme

Under this scheme, you charge VAT on your sales, reclaim VAT on your purchases, and submit VAT returns quarterly.  This scheme is appropriate for businesses with a significant amount of input VAT to reclaim. 

Flat Rate VAT scheme

This scheme simplifies VAT calculations by applying a fixed percentage to your turnover, rather than accounting for input VAT on individual purchases. The percentage varies depending on your industry. With this scheme, you keep the difference between the VAT you charge customers and the VAT you pay to HMRC. Flat Rate VAT is beneficial for businesses with relatively low input VAT. 

Keeping accurate VAT records

Maintaining accurate records is crucial for VAT compliance.

Your records should include sales and purchase invoices, receipts, and other relevant documents.

It is essential to separate VAT amounts clearly on your invoices and keep them organised to make the reporting process more efficient.

Numerous accounting software and cloud-based tools are available to assist in record-keeping, making it easier for small businesses to manage their VAT obligations.

Submitting VAT returns

VAT returns are usually submitted on a quarterly basis, although some businesses may be eligible for an annual return.

The VAT return includes details of any sales which VAT applied to, VAT purchases, and the amount of VAT owed to or by HMRC.

You can submit your VAT return online using HMRC’s online services or compatible accounting software.

Making VAT payments

When submitting your VAT return, you will need to pay any VAT owed to HMRC.

Payments can be made electronically, either through a direct debit or by debit/credit card.

It’s important to ensure that you make your VAT payment on time to avoid penalties and interest charges.

VAT inspections and compliance

HMRC conducts VAT inspections to ensure compliance with VAT regulations.

As a small business, it’s crucial to keep your VAT records up to date and accurate to avoid any issues during an inspection.

By maintaining meticulous records and following the VAT rules, you can demonstrate your commitment to compliance and minimise the chances of penalties or fines.

If you are unsure about anything related to VAT, get in touch now.