VAT Registration -

The very words are enough to strike dread into the heart of your average small business, but I promise there is no need to be afraid. VAT registration can actually be a good thing! Those of you who are already VAT registered can probably skim through this lesson but the rest of you can read on. I empathise with anyone who thinks that fear of VAT may be too much to deal because I’ve been in that very position - and come out the other end. If you are still uncertain or jittery about it then I urge you read this separate article I wrote titled “Is Fear of VAT Holding You Back?” I think it will help!

Otherwise - lets cover the basics and look at how VAT registration will help and hinder your business. As mentioned earlier, I am neither a tax expert nor an accountant but I do know how VAT applies to my own Ecommerce business so I can offer up advice on how it might apply to yours!

What is VAT?

VAT stands for Value Added Tax and it is essentially a consumption - or sales tax, entirely separate from income tax and corporation tax. Whether you are VAT registered or not, VAT is an important consideration for any business that supplies goods and services.

Who it Affects:

Businesses that sell taxable goods.

• Those who sell, supply or hire more than £90,000 of taxable goods in a 12 month period must register for VAT

• Those who sell, supply or hire less than £90,000 of taxable goods in a 12 month period are not required to register but they can do so voluntarily if they choose (for some businesses, this does makes sense).

  
  
  

What are taxable goods?

Most goods are taxable so unless you know that your products are exempt you should assume that they are taxable.

There are three basic rates of VAT

• Standard rate VAT (20%): applies to most goods and services. This includes things like furniture, appliances, clothing (except children's clothes), electronics, and restaurant meals.

• Reduced rate VAT (5%): on specific items like domestic fuel and children's car seats.

• Zero rate VAT (0%): on most food, books, and children's clothes.

• Exempt: Certain items like postage stamps and property transactions are not part of the VAT system.

• Out of Scope: Things like wages, MOT tests, statutory fees including toll bridge and congestion charges; goods purchased and used outside the UK, goods sold as part of a hobby e.g stamp collecting.

A list of goods and services showing which rates of VAT apply and which items are exempt or outside the scope of VAT is available on the Gov.UK website here.

https://www.gov.uk/guidance/rates-of-vat-on-different-goods-and-services

If you sell any products in the standard, reduced or zero rated categories then you should include those sales in your taxable sales turnover. If this turnover exceeds £90,000 - or if you expect your turnover to go over £90,000 in the next 30 days, then you must register for VAT.

How to register for VAT:

The information you’ll need to register for VAT depends on the type of your business.

The basic information required from a limited company is the company registration number, business bank account details, Unique Taxpayer Reference (UTR) and details of your annual turnover. You may also be asked for other details such as your self assessment, corporation tax and PAYE details if applicable.

If you are registering as an individual or a partnership you will need your National Insurance number, an identity document e.g passport or driving licence, your bank account details, Unique Taxpayer Reference (UTR), details of your annual turnover. You may also be asked for other details such as your P60, self assessment and payslips.

Once registered you will be issued with a 9 digit VAT number which is unique to your business. You should also sign up to the online services which HMRC provide for VAT reporting and account management. This includes the use of a Government Gateway account although you may be able to add VAT services to an existing Government Gateway account that your business holds.

VAT Reporting

Once you are VAT registered you will need to submit quarterly reports which confirm the amount of tax you have charged on your sales (referred to as output tax) - offset by the amount of VAT that you have paid to VAT registered suppliers and service providers and which you are reclaiming (referred to as input tax). The difference between your input and output tax is the amount of VAT that you are due to pay each quarter.

For example - you sell £30k of taxable goods on Etsy hence your output VAT is £5k (£25k plus 20% = £30k). You buy in £20k of stock and packaging plus £2k on courier services. Your output VAT is £3666. Hence the amount you are due to pay in VAT is the difference between the two which is £1334. As always, there are lots of variations to individual circumstances but this is the general way that VAT works.

Lets look at how Ecommerce businesses can make it easy for themselves

1. Charge VAT on your Product Sales: This is easy for Ecommerce businesses because once you supply the sales platform with your VAT number and confirm whether your goods are charged at Standard or Reduced rate, the VAT calculations will be automatically processed without you needing to do much at all. Your customers can receive a VAT invoice and you will be able to download sales reports which separate out the VAT from each sale. It is easy to work out your output tax ready for your VAT return.

2. Claim back VAT on your Business Expenses: You can claim back VAT you've paid on business purchases from VAT registered businesses, including stock, packaging, raw materials, office equipment etc. This will be clearly identified on any invoice you receive from a VAT registered company. Unless you are buying in zero rated, reduced rate or exempt products - or you are buying from a non VAT registered company, you will find that the standard 20% rate of VAT is generally charged. Your accounting or book keeping processes can/will be set up to record the VAT element of each purchase.

3. VAT returns and payments: You will normally submit an online quarterly return to HMRC showing details of your taxable sales and expenses. These returns detail the VAT you've charged on your sales and the VAT you've paid on purchases. The difference between the two is usually the amount you need to pay for your VAT bill. However, if you ever make more purchases than sales during a quarter then you will receive a VAT rebate!

4. Making Tax Digital (MTD) for VAT: Unless you qualify for exemption (few people do!), you'll need to use MTD for VAT. This means using software such as Quickbooks, Xero or Sage to keep your VAT records digitally and submit your returns electronically. This is actually a godsend and makes everyone’s life easier. Many sales platforms can be integrated with your accounting software meaning that you have very little to do once you have set up your systems. We will be covering more about this in later Chapters.

   
   
   

The Downside of VAT Registration

I spend my whole life aiming to be a positive person but I do have my limits and it would be a whitewash if I did not admit that of course there are disadvantages to being VAT registered. Let me tell you what they are before showing you that it ain’t all bad!

1. You will either have to put your prices up or take a hit on your profits - neither of which feels great!

2. If any of your suppliers are not VAT registered then you will be unable to reclaim VAT on those purchases.

3. You will need a decent book keeping system and accounting package in place and to know how to use them - or pay someone who does

4. Whilst the general VAT model is fairly simple, there are many sub layers which can be confusing.

It Ain't All Bad

First of all if I had allowed my fear of being VAT registered to influence my business decisions I would still have an annual sales turnover of £75k instead of a figure much higher than that. I loathe VAT bills but there are actually some notable benefits. I can only speak from my own experience, but it may resonate with you and provide some encouragement for you to let your business grow if it wants to!

• Yes, I wanted to stay below the VAT threshold, but there wasn’t a genuine business reason to do so. It simply was ‘the fear’ because I didn’t have the confidence, time or knowledge to take this step forward.  I had to remind myself that reaching the VAT threshold proved that I was more than capable of running a business. I owed it to myself and my business to let things flourish. 

• Yes, I freaked out, but I did the maths and worked out what the financial impact was going to be. In simple terms my VAT bill would be the difference between the VAT I owed for the goods and services I sold (output tax) – and the VAT that I would be able to reclaim (input tax) against applicable business expenses. The net VAT bill was less than I expected.

• Yes, I was worried about the paperwork but there are some great accountants, book keepers and software packages around that make life easier and do not cost the earth! If you are running a business then you are already capable of embracing all of this. You can also check out the VAT Flat Rate scheme which may suit smaller businesses and ensures that administration is kept to a minimum.

• Yes, being VAT registered meant that I had to rethink my prices, but, sadly, firing up a 20% increase to my customers was not an option. My products would have struggled to compete against similar, lower priced products. Instead, I had to take a hit on my profits but, fortunately, this was short lived. Being VAT registered meant that I could grow sales, and with my increased turnover, the bottom line soon returned to pre-registration levels and beyond! I was also able to reclaim all of the VAT I had paid on business purchases during the previous three years.  This meant that my first VAT bill actually took the form of a cheque from HMRC to me!

• Being VAT registered meant that my business was taken much more seriously and we were able to grow on the back of our improved credibility. I became a more attractive seller precisely because I was VAT registered. Customers and other business partners could see that we were well established, financially secure, successful, confident and trustworthy. What’s not to like about that?! eligible for training, schemes and grants which required applicants to be VAT registered.

for now, it may be of comfort to know that many of our international business counterparts face VAT registration from the outset i.e. there is a threshold of zero. The UK has one of the highest registration levels in the world which, in some ways makes us fortunate, but in other ways it imposes a ceiling which many are reluctant to break through. Registering for VAT terrified me, but it was a no-brainer for a retail operation and my business has benefited from increased credibility and the freedom to grow.

 

Voluntary Registration (Not as Crazy as it Sounds)

Don’t forget that you can register voluntarily for VAT even if you haven’t reached the threshold.  This is not as crazy as it sounds.  Being VAT registered can make you a more attractive and competitive business partner to other VAT registered businesses.  Many larger companies are looking for a VAT invoice for their purchases and if you can’t provide one then you may be overlooked.  Remember, if you are not VAT registered, the business world also knows that you are a small operator.

Other benefits of voluntary registration are that you can start to reclaim all of the VAT you have paid on expenses relating to your business.  In those quarters where your business expenses have exceeded your income, you may again be entitled to a VAT rebate.  For some businesses, voluntary registration can be even more advantageous.  For example, if you buy in standard rated goods and services – but you sell zero rated goods then it makes financial sense to be registered. 

 

Staying Ahead of the Game

Whatever you do, make sure that you do register as soon as you are required to – if not before.  There are penalties for late registration and, with so many payments being made online these days, it is not easy to hide from your responsibilities. 

Finally, if you are only operating in the UK then the post Brexit implications for EU VAT may not affect you but if you are, or intend to be, importing or exporting between the UK and EU there is also much to learn!  The new VAT requirements are way too much for this lesson but I will be covering more on this in later blogs.