I remember being delighted when VAT was increased to 20%. Not because I wanted to pay more for my chocolate biscuits,1 but because it was so much easier to calculate than 17.5%. Unfortunately, the standard rate is the simplest thing about VAT.
In this post, I’ll give you an overview of how VAT works, explain a few benefits of VAT registration, and also point out some of the downsides.
Before registering for VAT, you should definitely speak to your accountant. VAT registration brings many financial responsibilities, along with some stiff penalties for non-compliance.
Value Added Tax, or VAT, is a tax applied to the sale of goods and services. Businesses and sole traders with an annual turnover above £85,000 are obliged to register and then charge their customers VAT, even if the customer isn’t VAT-registered themselves. A benefit of VAT registration is that you can then claim back the VAT on any goods and services you’ve purchased for your business. The amount you pay to HMRC each quarter is the difference between the VAT you’ve charged your customers and the VAT you’ve paid on your purchases.
For example, say your turnover for the first quarter is £30,000. Of this total, £5,000 is VAT. You’ve bought various bits of kit, supplies, and paid rent on your office, amounting to £3,000. The proportion of those costs that’s VAT is £500. So, to calculate your VAT bill, you deduct the VAT from your purchases from the VAT you charged on sales. In this case, you give HMRC £4,500.
Some of that VAT money will be sloshing around in your bank account for a few months before you need to pay it. Make sure you don’t spend it!
This hopefully seems quite simple so far. However, there are a few different VAT rates and schemes.
You’ve probably noticed that VAT isn’t charged on everything and the rate sometimes varies. There are four rates:
If you’re a publisher, you wouldn’t charge VAT on paperbacks, but you’d need to charge it on ebooks (which are now on the standard rate).
Unless you’re selling zero-rated, exempt, or reduced products/services, you must charge 20% VAT once you’re VAT-registered. Remember, this is mandatory if your turnover exceeds £85,000.
This might sound unattractive if you have a good turnover but not much in the way of overheads. You get the faff of VAT without the benefits. Well, meet the flat-rate VAT scheme.
The flat-rate is a different system that benefits some eligible businesses. Under the flat-rate scheme (FRS), you still charge your customers VAT in the usual way, but you give only a percentage of it to HMRC. Sounds like a good wheeze, doesn’t it? The snag is that you can’t reclaim the VAT on your purchases unless you buy an eligible asset costing more than £2,000. The amount of VAT you pass on to HMRC depends on your business type. For instance, if you’re offering secretarial services, the rate is 13%; for accountants it’s 14.5%. Here’s what it looks like for Neil, a virtual assistant who invoices a total £45,000 over the year:
How it Works
Neil pockets £2,323.01, but he can’t claim back the VAT on the software and stationery he buys. This works well for Neil, as his overheads are small and he works only for large clients who can claim back the VAT on his fees.
For more information on the flat-rate scheme, take a look at HMRC’s webpages.
Before registering, speak to an accountant to make sure it’s the right move for you. Once you’re registered, it’s tricky to deregister.
You can register for a VAT Online Account through the Government Gateway.
If an accountant will be managing VAT for you (which is highly recommended), you’ll need to nominate them as an agent to act on your behalf.
There are a few stages, so be patient!
Not all VAT registrations are accepted. For instance, HMRC might decline your application if they decide you’re a tiny business and unlikely to generate much taxable revenue. Of course, the scheme exists to generate income for the government, not to help businesses. You can appeal by providing supporting evidence.
Once you’re registered, you have to submit your quarterly VAT return online, using a Government-approved system. This is part of the Making Tax Digital initiative. Most of the major accounting software providers such as Xero and FreeAgent will have this covered. You can no longer submit paper-based forms.
You have to submit a VAT return, even if there’s nothing to pay or reclaim. If you do owe money, you can pay by standing order, direct debit, bank transfer, or corporate credit card. The due date appears on your VAT return. Any refunds are transferred to your bank account (make sure you provide the details when registering), usually within 10 days of submitting your return.
You can reclaim VAT on purchases made in the six months before registration, and also on some expenses within the previous four years.
This is absolutely not financial advice. Please speak to your accountant before deciding to become VAT-registered.
At the moment, it’s easy to think there’s very little that’s within our control. Unfortunately, we’re right. However, this makes it even more important to focus on what we can control.
In The Seven Habits of Highly Effective People, Stephen R. Covey1 separates our lives into three concentric circles: control, concern, and influence.
The Circle of Control includes events we control directly. In the Circle of Influence, we find those areas where we have some control, but are also partly affected by the behaviour of other people. Finally, the Circle of Concern is everything that affects us, yet we’re powerless to change it. When I use the exercise with clients, this circle is usually inhabited by Brexit, parents-in-law, and spiteful weather.
As you’ll see, the Circle of Control is minuscule – perhaps the size of a 10p coin. But there’s enough space for a few tiny actions. And tiny actions, over time, build up into big results.
In financial terms, it might look like this:
There’s flap-all we can do about interest rates, stock market performance, or government policy. And we have only limited control over how much we earn – for instance, a customer might go bankrupt leaving our invoices unpaid, or we become unable to work due to illness. What we control is those daily habits around spending, saving, and investing.
Focus on that 10p coin, and ignore the rest.
Perhaps you’ve already started preparing for this Christmas, or maybe you’re avoiding it till the very last minute. Well, I want you to think about next Christmas. Yes, Christmas 2020. You’re right, I’m a complete sadist. And to suck even more fun out of the situation, I’m going to talk budgets. You need to get started now to plan for the next one. Stick with me.
Imagine I’m a cheery Ghost of Christmas Future. I introduce you to a heart-warming festive scene where you haven’t spent too much money and there’s no massive credit card bill in January. Everything’s paid for upfront and you haven’t wasted your money on unnecessary rubbish. Sound good? Here’s how …
If you’ve already started shopping, you’ll need to go through those credit card statements. This serves three purposes:
Make sure you’ve included everything – batteries, Sellotape, Secret Santa pressies.
Once the tree comes down and you’ve eaten all the pickled onions, it’s time to look back over what you’ve spent. With a critical (but gentle) eye, consider all those expenses. Was anything unnecessary? This isn’t about stinting yourself. Rather, the aim is to find ways of cutting expenditure without affecting your enjoyment. We all tend to panic-buy in December, even though the shops are only closed for one day.
Here are a few tips to help cut the costs:
Once you’ve established the true cost of Christmas, you can budget properly. If the total bill comes to £600, you could put aside £50 each month, rather than scrambling to find the full amount in January when you also need to pay your tax bill. Even if you saved part of the cost, it would relieve some of the pressure on you. Reward yourself with a small sherry and then bore your relatives with tales of heroic financial prudence.
Christmas budgeting maybe doesn’t sound like much fun, but it means you can enjoy yourself without worrying about what happens in January.
If Christmas is your thing, I hope you have a great one.
Christmassy piggy © pogonici – stock.adobe.com