Value Added Tax (VAT) is a thorn in the side of customers and business owners alike, but the quicker you understand what you’re dealing with, the less it will sting in the long run.
Our essential guide explains how much VAT you should pay, how much you can claim back, and what happens if you don’t have enough money to make up the difference.
Step 1: start by knowing the facts
What is VAT?
VAT is a tax added to the price of most goods and services, generally at 20%. Business owners charge VAT on the goods or services they sell, but they must also pay VAT on the goods or services they purchase in relation to their business.
To charge VAT as a small business, you must first register for VAT with HMRC. You only have to register if your turnover exceeds £83,000 in a 12-month period. However, many small businesses voluntarily register if they intend to grow quickly or sign up to the Flat Rate VAT scheme where you can pay HMRC a fixed percentage based on the sector you are working in and keep the difference from the VAT you have charged.
Read about Flat Rate VAT at GOV.UK.
When should I pay?
When submitting a VAT return as a small business, you can deduct the VAT you have paid out from VAT you have charged. This will either leave you with an amount owed to HMRC or show you are due for a refund from HMRC.
It’s good to understand VAT rates, if you’re going to stay on top of your outgoings:
- The standard VAT rate is set by the Government and is currently 20%. This is charged on most goods and services.
- A reduced rate – usually 5% – is set against items that are often a crucial ‘need’. For example, your electric and gas.
- A zero rate of VAT applies of 0% on certain goods including children’s clothes and shoes or equipment for disabled people. Other things will be officially VAT-exempt.
Most small businesses submit a VAT Return online to HMRC every 3 months. This period of time is known as your ‘accounting period.’ The deadline for submitting the return online and paying HMRC are usually the same – 1 calendar month and 7 days after the end of an accounting period. You also need to allow time for the payment to reach HMRC’s account.
Don’t forget that you must submit a VAT Return even if you have no VAT to pay or reclaim.
Step 2: Stay on top of your paperwork and save
By staying on top of your paperwork all year round, you’ll have less to worry about if and when you need to pay your VAT. There are two ways to do this: hire an accountant, or use accounting software and get a handle on your own taxes.
The Zettle POS app collects and stores all your sales data safely to the cloud so that you can keep an eye on how much you’re selling and when. You can also integrate your app with an accounting system, such as Xero, so that all your taxes are worked out in advance.
Once you have this information sorted, you simply need to set aside the money that you’ll pay to HMRC each period.
Hiring an accountant is a great way to stay on top of paperwork. An accountant can help with everything from writing a business plan to filling out your tax return and calculating what you owe, but they can also advise on any potential pitfalls to stop you from making mistakes before they happen.
Step 3: Apply for a short term loan or cash advance
Most small businesses run on a tight budget, especially in the first few years of trading, so sometimes a VAT bill can cause havoc with your cash flow.
You may not have considered taking a business loan before, but they can be useful for covering large outgoings that only come along a few times a year.
It may be hard to secure funding from your bank to cover tax bills, but a reputable small business lender will have a range of options that can save the day when you need it most.