Is it worth voluntarily registering for VAT?

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.

What is VAT?

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.

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Watch Out!

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.

Different VAT Rates

You’ve probably noticed that VAT isn’t charged on everything and the rate sometimes varies. There are four rates:

  • Standard – that’s the 20% charged on most goods and services
  • Reduced – home energy, sanitary towels (controversially) are charged at 5%
  • Zero – applied to printed books, newspapers, children’s clothes, many foods
  • Exempt – health services provided by registered professionals, education provided by a school/university/college

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 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:

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How it Works

  • Total VAT charged to his clients @ 20% = £7,500
  • Total VAT payable to HMRC @ 13% = £5,176.99
  • Saving = £2,323.01
  • 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.

    How to Register and Pay VAT

    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.

    It could be worth voluntarily registering for VAT if:

    • You have a lot of overheads on which you’re paying VAT, e.g. office space, raw materials, software
    • Your clients are mainly large businesses (although please note: as they’re usually exempt-rated, universities and NHS are often unable to reclaim the VAT)
    • You’re approaching the threshold

    You can reclaim VAT on purchases made in the six months before registration, and also on some expenses within the previous four years.

    Voluntary VAT registration could be disadvantageous if:

    • Your business mainly serves individuals – e.g. you’re a hairdresser or a gardener, those customers will see a 20% hike in your charges. They might baulk at this increase and ditch you for somebody cheaper. Essentially, it can make you less competitive.
    • You’re managing all your accounts yourself. Hiring an accountant could cost more than you save.
    • You’re pants at managing cash flow. You’re probably receiving income monthly, but you need only stump up the VAT quarterly. This means there’s often some extra cash sloshing about in your account. Some people use this to help their cash flow; others dip into it and then have a stressful time paying the bill when it’s due. There are expensive penalties for non-/late payment.

    Key Points

    • You’re obliged to register for VAT once your turnover hits £85,000 per year.
    • You must charge 20% on all good and services, unless they’re zero-rated, reduced or exempt.
    • Your clients might be unable to claim back the VAT, making you more expensive.
    • VAT registration brings many responsibilities, so make an informed decision.
    • You should speak to your accountant before taking action to ensure you understand all the implications.
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    Warning

    This is absolutely not financial advice. Please speak to your accountant before deciding to become VAT-registered.

    1. plain biscuits are zero-rated []

    Become a Control Freak

    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.

    1. Covey had nine children, so was clearly highly effective In all areas of his life. []

    How to Have a Merrier Christmas

    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 …

    Step 1 – Keep a record of everything you spend this Christmas

    If you’ve already started shopping, you’ll need to go through those credit card statements. This serves three purposes:

    • It ensures your spending is intentional. You’re making conscious decisions to buy something, rather than automatically clicking ‘buy’ without thinking.
    • You know exactly how much Christmas costs so you can budget your spending for next year.
    • You can review the spending afterwards to see whether it truly sparked Christmas joy. That’s what we’ll do next.

    Make sure you’ve included everything – batteries, Sellotape, Secret Santa pressies.

    Step 2 – Review your spending

    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:

    • Don’t stockpile Twiglets in October when they’re on a 3 for 2 offer. Unless you’re admirably self-restrained, you’ll eat them all before Christmas. Supermarkets know that’s what we’ll do. Did you really need that tub of Miniature Heroes, or did you take them to the office in the New Year because you were sick of chocolate?
    • Keep a list of potential presents during the year. You don’t have to actually buy them in April – that’s terrifyingly efficient – but you’re more likely to spend money on gifts that people actually want, rather than wasting 30 quid on a boxset of salted caramel toiletries that sit untouched in somebody’s cupboard.
    • Talk to friends and family about cutting back. They’ll probably be relieved that you’ve initiated the conversation. After all, most of us tend to overspend and then regret it.

    Step 3 – Start saving for next Christmas

    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

    Christmas Countdown

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