It may seem counterintuitive to think that registering to pay more tax in the form of VAT would actually be beneficial for your small business, yet that is the case!
With all the rage going around with the hiked VAT prices of fuel VAT is a hot topic right now. Becoming a VAT registered business and paying/charging VAT voluntarily can actually financially benefit you and your turnover, and here’s how.
What is VAT, and what does VAT registered business mean?
Before you consider how voluntary VAT registration might benefit you, you should know precisely what VAT is and how it works. We have some great tips from Auditox Accountancy in Darlington who are continuously doing VAT Tax Returns. First of all, VAT stands for value-added tax. It is a tax that is applied to the purchase price of the majority of goods and services sold in the UK and actually accounts for one-third of the revenue collected by HM Revenue and Customs each year.
There are 3 main VAT rates. These are standard, reduced, and zero. For businesses offering goods and services in the standard VAT bracket, their products will have a 20% charge added to the purchase price. Businesses in the reduced bracket will have a 5% price increase, and those in the zero brackets do not have to add VAT to their prices. Which category your business belongs to will depend on the products and services that you offer, but the majority of companies will be in the standard VAT category. Some sales in the UK are VAT exempt, such as insurance, education, healthcare, and postage stamps.
To be VAT registered means that you are listed with HMRC as active in production and sales, and subsequently means you are able to start charging VAT. However, it also means your business is then required to pay VAT, which is covered by the 20% increase in your product prices.
What are the benefits of being a VAT registered business?
1. More competitive costs to other VAT registered businesses
VAT registered businesses can reclaim VAT on their expenses. So if you spend £10,000 on goods and services for your company, but 20% of that was VAT, you can get it back. Likewise, if you’re selling your products to other businesses or companies that are VAT registered, suddenly they get 20% off of your products. This might make them more inclined to spend with you.
2. Appearances matter
VAT registered businesses get a VAT certificate and can use their VAT number on all of their official documents and invoices. This can make your business appear much larger than it is since the VAT threshold for compulsory registration is profits over £85,000. Getting VAT registered also suggests that you’re a reliable and trustworthy company to work with or shop with.
3. Increased profits
If you make £50,000 a year after tax, but you spend £20,000 in order to do so, your net profit is £30,000. Once you become a VAT registered business, you can reclaim the VAT from your business expenses. Which, at 20%, gives you £4000 to add to your annual business turnover.
4. Investors
Becoming a VAT registered business will allow you to begin charging VAT and a 20% increase in the cost of your products. Whilst this then goes to HMRC as VAT payments, it provides your business with a higher cash flow. This often suggests to investors that your business is worth their attention, and potentially worth their investment.
5. Reclaiming VAT
Once you’re VAT registered, you can not only reclaim VAT on your current purchases but you are entitled to reclaim VAT on items purchased in the last 4 years so long as you still use them for the benefit of the business.
How to become VAT registered
Despite the changes in VAT in 2022 VAT registration is relatively straightforward. For most companies and businesses, voluntary VAT registration starts with registering online at the HMRC website. Even partnerships can register for VAT in this way. By registering online, you will have created an online VAT account and will receive a VAT registration number – also known as a government gateway account – which you can use to submit VAT returns to HMRC. Alternatively, you may choose to work with a tax agent who will file VAT returns for you.
Other companies may need to register for VAT by post. If you want to apply for a registration exemption or you want to join the Agricultural Flat Rate Scheme, or you’re registering divisions of a body corporate under separate VAT numbers. You can use the VAT1 form (downloadable from HMRC) for your registration.
Once your VAT registration is complete, you will be sent a VAT registration certificate within 30 working days. This will either be sent to your VAT online account or to your address. If you registered by post, you will first receive a VAT registration number to allow you to make a VAT online account.
You can deregister for VAT if your business stops trading and thus is not going to make any future sales, if your business has been sold or if your business joins a VAT group. You can do this online or by filing a VAT7 and sending it by post to HMRC.
What do VAT registered businesses have to do?
Whilst small businesses do not have to register for VAT, those that do obviously then have additional responsibilities. This is one factor that prevents many small business owners from registering, as they fear that voluntary registration would just add extra paperwork and accounting that they frankly don’t have the time for! But with the help of expert accounting software and good planning, the additional financial planning required for VAT invoices and VAT payments is negligible.
That being said, from your ‘effective date of registration’ which for voluntary VAT registration is the date you registered (or submitted your registration), you are responsible for charging the correct amount of VAT, ensuring that you pay HMRC any VAT due, submitting accurate VAT returns and keeping up-to-date VAT accounting records and a VAT account.
You pay VAT as well as other taxes like national insurance contributions and income tax or corporation tax – so be sure that you keep accurate documents for all three.