Seeking VAT comments for Metro piece

Journalist: Rosie Murray-West, Freelance

ended 22. March 2022

For the Metro. I'm looking for small business experts to talk about how to manage VAT once businesses hit the threshold, e.g. tips for setting up systems, claiming VAT back etc, and the flat rate scheme. Also looking for businesses that have done this recently and have tips and any experience to share. 

6 responses from the Newspage community

Star Quote
"So, you’ve just hit £85,000 turnover or you’re going to exceed it shortly, so you’re getting yourself registered for VAT. Firstly, get yourself on a decent system, Xero is our preferred one, this way you’re set up for MTD, and this will make your VAT returns simpler! Despite the adverts though, it won’t file the VAT return for you, and what you put in is what you’ll get out. Make sure you’re paying attention to your purchase invoices, and only adding VAT when it’s relevant. Even better, outsource it! I’m sure you can think of a hundred things you’d prefer to be doing. If you’ve gone over the threshold, make sure you register quickly, as failure to register on time can be a costly mistake. We’ve seen it, and it can be eye-watering. Again, if you’re teetering around the amount, invest in a system and keep it updated to ensure you don’t miss your deadline. A huge opportunity to ensure you lower that first VAT bill is to consider any VAT on items you’ve brought before registration day, so if you’re brought yourself a van within the past four years, or other kit, or pre-paid services relating to the VAT registration period, then you can claim all this VAT back, too (make sure you’ve got the invoices). This is called pre-trading expenditure. Google it. I promise it’s not too good to be true. Also don’t miss out on claiming VAT back on your mileage. You can make this easier with apps such as Tripcatcher. There are also other schemes to consider, to reduce the admin burden. Annual accounting schemes mean you only need to do the VAT returns once a year, although you pay on account still. Consider whether you want to be on cash accounting, as this allows you to account for VAT as and when you pay or receive the money, rather than how accountants work the numbers out. This can be super useful if you have slow payers. Finally, if you opt for the flat rate scheme, you issue your sales invoices with normal VAT added, however you pay VAT over to HMRC based on a flat-rate percentage. It’s less admin and can save you money. It’s worth doing some number crunching to check though. I know you'd expect me to say this, as I’m an accountant, but I’d outsource it, as getting it wrong can be costly."
Star Quote
"Businesses under, but approaching the VAT threshold, should monitor their turnover incredibly carefully. The reason for this is that, once you hit the threshold, HMRC will expect you to begin collecting VAT on your sales. If this is only recognised when completing your year end accounts further down the line, you will need to apply for a backdated VAT Registration and either issue a revised invoice to customers with VAT where it should have been charged or take the hit and lose the VAT element from your gross sales. Now that is very painful. "Once VAT-registered, you are able to claim back VAT for pre-registration purchases for up to 6 months for services and four years for goods you still have or that were used to make goods you still have. "With Making Tax Digital, all VAT-registered businesses should maintain electronic records digitally such as VAT on goods or services sold and VAT on goods or services purchased. Most businesses comply with this by using Cloud Accounting Software such as Xero or Quickbooks, which maintains the business books digitally and allows VAT returns to be produced and submitted to HMRC. "Ensure that once you have registered for VAT and Making Tax Digital that you are able to link your Government Gateway account to your Accounting software. Otherwise you may not be able to submit your VAT return digitally. Your Accountant can also help with this by applying for a 64-8 Agent authorisation. "You can only reclaim VAT from HMRC when the cost is wholly and exclusively for business purposes. VAT cannot be reclaimed on items enjoyed in a personal capacity. The VAT on some costs may proportionatly be reclaimed where they relate to business and personal use. Some costs are blocked for recovering VAT such as business entertainment. You should therefore familiarise yourself with what VAT can be reclaimed and how much. "If selling goods or services overseas or digitally, there may be complex rules on the rate of VAT to be charged and where it is collected. Always check who you are selling to, if they are a business or consumer and where they are located. When selling overseas, VAT can become even more complicated. "Cloud accounting software allows businesses to keep electronic copies of invoices, receipts or other documents, which is recommended in the event of a HMRC VAT inspection or audit. Always make use of this functionality where available. "Ensuring that you are able to pay your VAT bill is important and a lot of businesses ringfence funds for VAT when their invoices are paid by customers. By way of example, 20% of their daily takings or sales receipts may be transferred to a separate bank account to ensure that they have the funds available to pay the VAT bill without it being spent on day-to-day expenditure. "If in doubt, always ask your accountant (if you have one)! They should be happy to help with general VAT queries or assist with filing your VAT return. If they are unhelpful, change Accountant! It is your business that will be liable for any VAT errors discovered by HMRC."
Star Quote
"I decided to VAT-register my business before I hit the threshold. I realised that because my product business (locally made luxury textiles and wallpapers) is very investment heavy, I could claim back a large amount of money, which really helped with my cash flow. I backdated around three years' worth of expenses and was able to claim around £12,000. I already use Xero for my accounts so have not found the process too onerous. I just need to make sure my accounts are up to date every three months, which ensures I never get too behind. Some quarters I invest lots in product development or an expensive trade show and I might be able to claim money back from HMRC, and other times when I've made lots of sales I have a bill to pay but it works well for me."
"Since we are about to get into this we've done a bit of research and the key things to consider are: keep records of both sales and purchases, know the difference between VAT rates like standard, reduced, exempt and zero; and choose the right accountant to help you take advantage of being VAT-registered. Use a Bank app like Starling Bank to help you keep a proper digital track record. Consider registering early on before you hit that threshold as you'll increase your chances of being chosen by certain businesses to do business with. We've experienced rejection for not being VAT-registered so for some companies it does matter. You are perceived as a 'grown up business', as ridiculous as that sounds. Make sure you do proper research, specifically when working with huge companies. My advice is simple: consult an accountant and partner up with someone who can help you grow by keeping you afloat."
Star Quote
"Exceeding or expecting to exceed the VAT threshold of £85,000 in a rolling 12-month period may be as a result of abnormal trading conditions. If abnormal trading conditions have resulted in revenue being increased within a year whereby the turnover is forecast to be higher than the £85,000 threshold, but then very likely to return to below £85,000 and an explanation and evidence are available, HMRC may agree to defer VAT registration for a while to allow a period for normal trading conditions to return. Writing to HMRC with the explanation and evidence may result in them agreeing to a deferment. Being forced to register due to unique and unusual Covid-related trading conditions can be disastrous for some businesses and well worth assessing whether VAT registration can be deferred for perfectly legitimate reasons." By way of example: a dog boarding and walking business would typically not have turnover of more than £85,000. Due to lockdown and restriction on travel, after travel restrictions were lifted a huge surge of people wanting to travel happened. This created a short period of abnormal trade increase in sales for a couple of months potentially taking the business over the VAT threshold for registration. Sales returned to normal levels, below £85,000 quite quickly and therefore the business has reasons and evidence to request HMRC for deferment of VAT registration. Adding VAT to this business would very likely make trading difficult and uncompetitive against the same businesses that had not reached the threshold."
"For me, VAT matters are best left to an accountant. Mine certainly are. Any small business worth its salt should have a good accountant who will advise them on such matters. In our case, the flat rate system was most appropriate for us."