Businesses operating in the United Kingdom are required to register their VAT if their taxable earnings surpass £85,000 for the past year or will most probably exceed the given figure in 30 days or less, or they’re receiving goods from Europe worth over £85,000.
In addition, companies may choose voluntarily VAT registration in case their taxable revenue is below £85,000. It can prove helpful to a number of businesses that have recently launched or operating on a small scale.
Important to note: ‘Taxable turnover’ refers to the money earned by the business by selling their products or services when compared to ‘taxable profit’. Taxable profit is basically the surplus cash that remains after all the expenses are deducted from the total profit.
Positives And Negatives Of VAT Registration
- A limited firm is free to charge VAT on services and goods it sells in the form of output tax.
- Similarly, a limited firm is able to reclaim VAT which they’ve paid on goods purchased from other businesses in the form of input tax.
- Companies are eligible for the refunds of their VAT provided they have sold zero-rated services/products and buy standard-rated goods.
- Showcasing a VAT number on your official site, invoices, business correspondence, etc., is likely to encourage large-scale companies to collaborate with your firm. A number of big companies, especially the ones in the finance field, won’t even consider collaborating with a company without a VAT number. Plus, it can help if you can generate a VAT invoice in case your customer or client requests you to do so.
- Your business can appear more popular and trustworthy through a voluntary registration of VAT, specifically, if you’re looking to partner with other VAT registered clients and companies.
- VAT registration allows you to claim authentic goods purchases for up to 4-years prior to registration & services up to 180 days.
Charging value-added tax on specific services or products may put off current or potential customers, especially if they have not registered for VAT themselves. So, it is necessary that you make sure VAT registration doesn’t affect the popularity of your services or products by making them seem unreasonably priced.
In case the output tax of a company surpasses the input tax, it’s important to pay the difference between the two to HMRC. It could lead to additional problems in case a company faces a large, unforeseen VAT bill.
Registering your business for VAT leads to an added burden of further paperwork and administration. Businesses are required to maintain precise VAT invoices and accounting reports, besides submitting a quarterly return of their VAT. Even though this may put off some business owners, voluntary VAT registration can be totally worth the additional work for a number of businesses. Lastly, you’re free to cancel the VAT registration anytime you want if you think you’ve made a wrong decision or simply want to cancel it for any other reason.
Reclaiming Your Value Added Tax
You are typically able to reclaim your VAT on any products or services purchased for business purposes, even if they are bought prior to your business was VAT registered.
You can reclaim VAT on anything which you purchase for both business and individual use proportionately, including things such as rental of the telephone line, internet charges, energy bills, phone calls, and private residency used for business operations.
Making VAT Digital And How It Can Affect Your Business
You must keep records along with the necessary VAT invoices for supporting your claim. You must also be able to demonstrate how you came to the given figure for the value-added tax you are claiming back.
You cannot reclaim your VAT on:
- Things that are purchased only for individual use.
- Expenses associated with business entertainment, services, or goods used for making VAT exempt supplies.
- Items bought from other countries in Europe, receiving business resources recognized as a going concern.
- Things bought under 2nd-hand margin VAT scheme.
Cancelling Your VAT Registration
It is important for a company to cancel its VAT registration when it’s ineligible for registration. Some examples of these include companies that have terminated their trading operations or stopped making supplies taxable through VAT, etc. Businesses may decide to cancel their registration on any given day, provided their taxable turnover through VAT is below the present threshold.
In order to remove your registration for VAT, you can use the online portal or post service to contact HMRC within 30 days after sending your request to cancel, and you must provide the date when you want the registration to be cancelled. Till the given date, you must continue charging and accounting for VAT as you normally do.
You should be contacted by HMRC within three weeks confirming the de-registration of your company. You may need to submit the VAT return one final time. Also, it is important to preserve all VAT records for six years from the given date.
Alternative Flat Rate VAT Scheme
Business owners typically reclaim or pay VAT taking into account the difference between the VAT paid on their purchases or VAT charged by selling their products or services.
The primary purpose of the Flat Rate VAT Scheme was to minimize the administrative load on small companies by enabling them to pay a set amount of VAT to HMRC. Meaning business owners are allowed to keep the difference between the amount they charge and the amount they pay in the form of VAT. However, they are only allowed to reclaim VAT on purchasing capital assets of £2,000 or above.
To join Flat Rate VAT Scheme, a company is required to register for VAT plus have a yearly taxable turnover of no more than £150,000 (excluding VAT). You can join this scheme online whilst registering your limited company for value-added tax.