Value added tax, abbreviated as VAT in some countries, is a goods and services tax assessed on the value of a product or service. VAT regulations in the UK are rather strict, requiring most businesses that meet certain conditions to collect VAT from customers and then send the proceeds to HMRC on a regular schedule.
Owners of brand-new start-ups need to be cognisant of how VAT rules apply to them. Not paying VAT when due and in the correct amount could lead to significant penalties. The last thing any small business owner needs is trouble from the government. In light of that, here are five things start-up owners should know about VAT right from the get-go:
1. Who Must Charge VAT
Businesses that sell retail products and services must look at their VAT turnover to determine whether or not they have to collect and pay the tax. The current rate is £85,000. That means everything a business sells that is not exempt from VAT is up for grabs. Business owners have to tally up the total sales of those products and services in order to decide whether or not to register.
As the owner of a new start-up, you may not have any reasonable expectation of your turnover for the coming year. The general rule of thumb is to anticipate if you think you might exceed the threshold. If you do exceed the threshold but you fail to register for VAT, you will have to make up what you owe at some point.
2. When to Register for VAT
The law dictates that businesses must register for VAT as soon as their turnover eclipses the threshold or they have a reasonable expectation that it will during the current month. This is a sort of a grey area. Why? Because the government offers exemptions to some businesses for which turnover only eclipses the threshold temporarily.
This exemption along, with not being able to predict income for a new start-up, can make the decision to register a tricky one for owners of brand-new businesses. And unfortunately, there is no easy way around it. If there’s any chance your VAT eligible turnover will eclipse the threshold during the current month, register as soon as you can.
Should your turnover eclipse the threshold before you register, you must register before the end of the month in which it occurs. Your official date of registration will be counted as the first day of the following month.
3. Collecting VAT from Customers
When you register is essential for the simple fact that you cannot begin to charge customers VAT until after you have registered and received your certificate. That could leave you in quite a hole if you wait until you have £85,000 before you register. Why? Because you will still owe VAT on the total amount of your eligible sales regardless of when you registered.
Let’s say you finish the month with total VAT eligible revenues of £95,000. You will owe VAT on £10,000 for that month even if you have not started charging your customers. And since you cannot begin charging until after you receive your certificate, any shortfall will come out of your pocket.
4. Counting Items Other Than Direct Sales
Calculating whether you have reached the threshold or not involves certain things not related directly to sales. These are things like:
- business goods you loaned to customers
- business goods used for personal reasons
- business goods involved in bartering or exchanging
- business goods given to others as gifts
- building work in excess of £100,000 you handled yourself.
The take-away here is that there are certain goods and services you might utilise outside of direct sales that are not considered VAT exempt. Their value goes into your calculations for both determining whether you’ve reached the threshold and what you eventually pay when you do register.
5. You Can Pay VAT with Loans
At some point, you will be registering for VAT if you sell goods or services that are not exempt. You also might find yourself behind on VAT payments until you get the hang of things. Don’t panic. VAT Loans are available to help you make payment on time.
VAT loans should not be viewed as a permanent solution to an ongoing problem. In other words, if you are consistently having trouble finding the cash to pay VAT when it’s due, you really have a cash flow problem that requires a change in the way you do business. Loans are intended to be a one-off solution to an unexpected problem.
As the owner of a new start-up, you have a lot to pay attention to. Do not let the hectic nature of running a business distract you from your legal obligations. Be especially mindful of VAT, understanding that at some point your business may be required to charge customers and then forward that money to HMRC.
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