As a small business owner, understanding the ins and outs of VAT can seem like a daunting task. With so many rules and regulations, it can be challenging to determine when your business needs to start paying VAT and if it’s beneficial to do so voluntarily. In this article, we will explore the VAT threshold and provide some legitimate ways to stay under it, allowing you to make informed decisions for your small business.
Firstly, let’s define what VAT is and why it’s essential for businesses to pay it. VAT, or Value Added Tax, is a tax that is added to the price of goods and services in the UK. It is a consumption tax, meaning that it is paid by the end consumer rather than the business. As a small business, you are responsible for collecting and paying VAT to HM Revenue and Customs (HMRC) if your business’s annual turnover exceeds a certain threshold.
So, what is the VAT threshold, and at what point does your small business have to start paying it? Currently, the standard VAT threshold is £85,000. This means that once your business’s annual turnover reaches or exceeds £85,000, you are required to register for VAT and start collecting and paying it to HMRC. However, it’s crucial to note that this threshold is based on your business’s taxable turnover, which includes all sales of goods and services, except for those that are exempt from VAT.
But what if your business’s annual turnover is below the VAT threshold? In this case, you have the option to voluntarily register for VAT. Voluntary registration can have its advantages, such as being able to reclaim VAT on your business expenses. It can also give your business a more professional image, as many customers may expect a registered business to charge VAT. However, it’s essential to carefully consider the potential costs and benefits before making this decision.
One way to stay under the VAT threshold is by using the Flat Rate Scheme. This scheme allows businesses with an annual turnover of £150,000 or less to pay a fixed rate of VAT on their turnover rather than the standard 20%. The fixed rate varies depending on the type of business, but it can be as low as 4%. This can be a beneficial option for small businesses, as it simplifies the VAT process and can result in lower VAT payments.
Another legitimate way to stay under the VAT threshold is by using the Cash Accounting Scheme. This scheme allows businesses with an annual turnover of £1.35 million or less to account for VAT on their cash flow rather than their invoiced sales. This means that you only need to pay VAT when you have received payment from your customers, rather than when you issue an invoice. This can help with cash flow management, especially for businesses that have long payment terms with their customers.
Additionally, you can also consider dividing your business into separate entities to stay under the VAT threshold. This strategy is known as ‘VAT grouping’ and is only available for businesses that are closely related, such as a parent company and its subsidiaries. By doing this, each entity can have its own VAT threshold, allowing you to stay under the limit and potentially save on VAT payments.
In conclusion, the VAT threshold is an important factor for small businesses to consider. Once your business’s annual turnover reaches or exceeds £85,000, you are required to register for VAT and start collecting and paying it to HMRC. However, there are legitimate ways to stay under the threshold, such as using the Flat Rate Scheme, Cash Accounting Scheme, or VAT grouping. It’s vital to carefully evaluate your business’s financial situation and consider the potential costs and benefits before making any decisions regarding VAT. By staying informed and making strategic choices, you can ensure that your small business remains compliant with VAT regulations while maximizing its profitability.