Blog Post

Understanding VAT: Essential Tips for Small Business Owners

VAT registration is often seen as a daunting point in the growth of a small business.

Aside from the admin of how to register and report, many small business owners understandably worry about how it will impact prices and profit margins.

Understanding VAT

The first step in registering for VAT is determining whether your business meets the VAT registration threshold.

As of now (January 2024), the threshold stands at £85,000 in taxable turnover over a 12-month period.

Once you trip this figure, you are required to register for VAT. 

Voluntary Registration

Voluntary registration may be worthwhile for certain businesses.

If all your customers are VAT registered businesses, you do not have to worry about passing on the additional VAT, and you can go ahead and recover VAT on your costs.

Registering voluntarily if your sales are zero-rated can also be worthwhile. This would generally apply to  food based businesses.

VAT Schemes

Most businesses will use the Standard Scheme – accounting for VAT on the date a transaction takes place for both sales and purchases.

The Flat Rate Scheme involves paying over a percentage of your annual turnover, rather than calculating VAT on all transactions.

This was introduced to simplify VAT admin, but with the use of cloud software these days, the benefit isn’t as clear as it used to be.

The VAT Cash Accounting Scheme is based on payment date, rather than transaction date (usually invoice date). This could be useful if you often have late payers, or longer credit terms – though improving credit control would likely be more beneficial.

How Will it Affect My Pricing?

The main concern for a lot of small business owners, is how registering for VAT will affect their pricing, and  therefore their bottom line.

Once registered, most businesses will have to charge VAT at 20% (the standard rate). This leaves you with a choice of increasing prices to take account of the VAT, keeping prices the same to include VAT, or gradually increasing prices to minimise the hit to customers.

This will largely depend on the type of customer your business serves.

If your customers are mainly VAT registered businesses, adding VAT to existing prices makes the most sense, as they will be able to reclaim the VAT and demand will not be affected.

If customers are mainly individuals, or other small businesses, gradually phasing in a price increase might make more sense. The downside is obviously that your bottom line will take a hit during this process.

Determining how demand would be affected by a price increase is often not easy, but doing some calculations around how many customers you would need to retain to have the same turnover with a price increase, can help you make those pricing decisions.

How to Register

HMRC have an online registration process, though engaging a professional is often advisable if you are unsure about the process, or how to calculate the impact on your business.

Submitting VAT Returns

VAT returns are typically submitted on a quarterly basis, but can be done monthly – the best choice will depend on business type, cash flow, and whether you usually pay or reclaim VAT.

Aligning quarterly returns with your year-end is often advisable.

Returns and any VAT due to HMRC are required to be submitted within one month and seven days of the period end.

Conclusion

With modern cloud software, the admin side of VAT is a lot more straightforward than it used to be.

Often the biggest concerns are which VAT scheme to use, and how to price when taking into account having to add VAT. As with most things, being proactive and considering these in advance of having to register, will give you the best chance of minimising the impact on your business.