Accounts and Tax Basics: Value Added Tax 

AH, VAT. Who would have thought that three little letters could be so misunderstood? People often fear Value Added Tax - and the relevant rules and regulations that come along with it. Yet, the truth is, VAT doesn’t need to be complicated - and it can actually be beneficial for your business! 

So, in this post, let’s walk through how VAT works, whether it makes sense to become VAT-registered voluntarily, and whether cash or accrual is the best system for you. 

Does My Business Need to Be VAT Registered?

As stated on gov.uk, businesses have to register for VAT if their VAT taxable turnover is more than £85,000. Keep a close eye on income, especially when you’re approaching the threshold, so that you don’t miss the tipping point. #

A point to watch out for is that you measure your VATable turnover on a 12 month rolling basis. For example for October 2023 you would count from November 2022 to October 2023 and for November 2023 you would count December 2022 to November 2023 and so on.

VAT must be reported to HMRC either monthly or quarterly. Doing this has now gone fully digital with the whole process taking place online.

With this extra admin to take care of, you might wonder why so many businesses voluntarily opt to become VAT registered. The answer lies not necessarily in a business’s turnover, but in who their customers are.

If you’re making B2B sales, and your customers are themselves VAT registered businesses, it makes sense to register voluntarily. This is because you can ultimately make more profit as you can reclaim VAT on your expenses

On the flipside, if you’re selling directly to the public, it likely doesn’t make sense to opt to be VAT registered. This is because your customers will need to pay an extra 20% for your product or service without being able to claim it back. 

How Much VAT Will I Charge and Pay?

There are 3 rates of VAT chargeable in the UK. The rate your business will charge depends on the type of goods or services it provides.

In reality, a large majority of businesses will charge the Standard Rate of 20%. Yet, a range of goods and services, from home to energy to children’s car seats, can charge a Reduced Rate of 5%. A handful of businesses, such as those providing construction services or food products, can apply a Zero Rate of - you guessed it - 0%.

Many businesses dread a big VAT bill. So, a helpful way to look at it? The VAT cashed in was never your money to start with. Instead, think of your business as collecting VAT on HMRC’s behalf, simply paying it over when the bill arrives. 

The Cash Vs. Accrual System

Once your business is VAT registered, there’s another choice to make; will you use the cash system or the accrual system? The difference comes down to timing. 

With the cash system, you calculate your VAT in accordance with when your invoices are paid and when you pay supplier invoices. With the accrual method, you calculate your VAT on the date of the invoice rather when the date it is paid. So, invoice a customer in January but don’t receive the money until March? You include it in the VAT calculation for January. 

Many people default to the cash system, but it’s not always the best. If you’re an online or bricks and mortar retailer, it often makes sense to use the accrual system because your invoices are paid at the point of sale. The same goes for zero-Rated businesses like those in the construction industry. 

The most important takeaway? Don’t avoid VAT just because it seems scary! If you’re VAT registered, plan ahead and put all VAT money you collect aside. Likewise, if you’re a B2B business that hasn’t VAT-registered because it seems like a hassle, explore whether registering could actually boost your profits.

Making VAT Simple With Clarity 

Still not sure whether to voluntarily become VAT registered? Or perhaps stumped when it comes to weighing up the cash vs. accrual system? Let us help! We ensure that our clients have the accurate numbers and expert advice they need to make smart decisions for their business. Get in touch today to find out more!