VAT for small businesses
Value Added Tax is a tax that suppliers of either goods or services charge on top of the cost of the goods or service. There are four different VAT categories depending on the type of goods and services supplied.
Education, finance, insurance, doctors and dentists are just some of the services that are exempt from VAT so if your business falls into these categories then you do not need to register for VAT. Note, that any health professional who is enrolled on a statutory register is exempt so, for instance, osteopaths and chiropractors are exempt, but some therapists, such as acupuncturists are not exempt. Full details can be found in HMRC’s “VAT for Health Professionals and Pharmaceutical Products” document.
Antiques and works of art are also exempt, as are admissions charged by charities and charity fund-raising events, although donated goods sold by charity shops fall under the zero-rated category. Voluntary donations to charities fall outside the scope of the VAT regulations.
There is typically no VAT to pay for the supply of the majority of food items although this zero rate does not apply to restaurants or takeaway services and neither does it apply to alcoholic drinks, sweets, crisps, ice cream and soft drinks. Children’s clothes and shoes, prescriptions, books and newspapers are also zero rated. If your business solely supplies zero rated goods you may not have to register for VAT.
This is a rate of 5% that includes fuel (solid fuel, gas and heating oil) and electricity used in homes and by charities as well as energy saving materials such as insulation that is permanently installed in homes. Central heating and boilers (including their installation and maintenance costs), solar panels and wind turbines also fall into this category.
The standard rate of VAT, which is currently 20%, applies to all goods and services not in the other three categories.
Registering for VAT
You must register with HMRC if your VAT taxable turnover is more than the VAT threshold, which is currently £81,000 in any rolling 12-month period. The VAT taxable turnover is the total value of everything you sell that isn’t exempt from VAT, and also excluding any capital assets that the business has sold such as vehicles, property or equipment. If the goods or services that your business sells are not exempt but your turnover is below the threshold then you may also register voluntarily.
Once registered you are responsible for:
- charging the correct amount of VAT
- paying the VAT due
- submitting VAT Returns
- keeping VAT records
It is important to register in good time as late registration may incur a fine from HMRC.
There is a special Cash Accounting Scheme to make the VAT system easier for small businesses, that allows you to account for VAT based on payments actually made and received, rather than based on invoices issued, which may be paid late or not at all.
Small businesses can also make just one annual return instead of the usual quarterly returns, again easing the administration burden for small companies. And registering for VAT can actually save your company money.
As with income tax or corporation tax it is important to keep detailed and accurate records for VAT. This includes all business invoices issued and received, bank statements and receipts for a 6 year period. Once your business is registered for VAT, if you haven’t previously employed an accountant, then that is a good time to do so.