As small businesses begin to grow, there becomes a point where they must register for VAT. This means charging an additional percentage on top of the sale price of their goods or services. Whilst there are many businesses that thrive after becoming VAT registered, for others it can be a struggle.
“Being VAT registered is killing my business” is a common complaint amongst many small business owners who begin to feel the pinch after VAT registration. So, what can you do if your business is struggling to succeed as a result of VAT? Read on to find out.
What is VAT?
VAT, or Value Added Tax, is a sales tax that is charged by VAT registered traders in the UK. When a business achieves a turnover above the VAT threshold, it must register for VAT and begin charging this tax to its customers. Businesses can also choose to voluntarily register for VAT before reaching this threshold, and there are certain benefits to doing so.
The amount of VAT that is charged depends on the type of product or service that is being sold. The majority of products are charged at full rate, which currently sits at 20% of the sale price. However, items such as children’s car seats and sanitary products are subject to a reduced rate of 5%, whilst most foods, children’s clothes and books are zero rated, meaning that VAT is not paid on these sales.
If a business has a turnover that is above the VAT threshold, they must register for VAT. This will then be charged to their customers whenever a VAT-chargeable product or service is sold. The money is then handed over to HMRC as VAT payments.
Who needs to register for VAT?
The VAT threshold is currently set at £85,000. This means that if your business has a turnover of £85,000 or more, you will need to register for VAT with HMRC. It’s important to note that turnover is gross sales, not profit. So, you shouldn’t deduct any expenses from your income when calculating whether you need to register for VAT.
You will need to register for VAT if you expect your turnover to exceed the VAT threshold in the next 30 days, or if your business had a turnover of more than £85,000 in the previous 12 months.
Once you’ve registered for VAT, a VAT registration certificate will be sent to you within 30 working days. If you registered for VAT online, this will be sent to your VAT online account. If you were unable to register online, this may be sent via post.
Do you lose money being VAT registered?
Many business owners worry that their business will lose money by being VAT registered. It’s important to note that VAT is not a tax that deducts from your business’ profits. In fact, VAT is paid by your customers, as a sales tax on the products and services that they purchase. It’s the responsibility of your business to take this money from your customers and hand it over to HMRC.
But if VAT is paid by customers rather than the business, why do so many businesses claim that VAT is having an impact on their business?
This is because customers see VAT as a price rise. Whilst VAT registered customers will be able to claim back any VAT that they pay on business purchases, those who aren’t a VAT registered business may look for other businesses to buy from. For this reason, VAT registration is likely to impact B2C customers more significantly than B2B customers.
What are the disadvantages of being VAT registered?
There are several disadvantages of being VAT registered, which often makes businesses more reluctant to register for VAT.
Firstly, as we talked about in the previous section, you must begin to charge your customers VAT whenever you make a sale. Whilst this won’t be an issue for business customers who are registered for VAT themselves, it does have the potential to put off consumer customers, who may be tempted to shop around for a lower priced option.
Being VAT registered also brings with it the requirement for some extra paperwork and admin, all of which takes time. You’ll need to raise a VAT invoice for every sale that you make, so that you can ensure that you charge the right rate of VAT. You’ll need to keep accurate records so that you can file a quarterly VAT return with HMRC.
Are there any advantages to being VAT registered?
Whilst there are some disadvantages of being VAT registered, there are also many advantages that you need to consider. After all, there’s a reason that many businesses choose to voluntarily register for VAT before reaching that all important VAT threshold.
For example, when a business is VAT registered, this means that they are able to reclaim the VAT on any business purchases that they make themselves. This means that by being VAT registered, you could make a saving on the raw materials required to produce your products or carry out your services.
Being VAT registered also adds credibility to a business, by making it appear bigger and more successful. Even if your turnover is below the £85,000 threshold, customers will assume that it is over this level due to your VAT registration. This could help you to win additional business and give you the edge over your competitors.
In addition to this, some suppliers will only deal with businesses that are VAT registered. This means that you may find it easier to source supplies for your business if you are registered for VAT.
How to stop paying VAT
If you find that being VAT registered is causing your business to suffer, it is possible to deregister from VAT. However, in order to do this, your annual business turnover will need to be under the VAT deregistration threshold, which currently sits at £83,000.
Alternatively, if you are no longer eligible to be registered for VAT, you must cancel your registration immediately. This could be the case if your business ceases trading, if you no longer make VAT taxable sales or if you join a VAT group.
If your business falls below the VAT threshold, or if you are no longer eligible to be VAT registered, you can request HMRC to cancel your VAT registration online. To do this, you’ll need to be logged into your Government Gateway account. You can also deregister for VAT by post, by completing form VAT7.
After requesting to deregister for VAT, you will receive a confirmation of the deregistration from HMRC, along with your official deregistration date. This will usually be sent to you within three weeks of the request being made.
How to reduce the tax strain on your business
If your business is struggling as a result of taxes, there are a number of steps that you can take to reduce the tax strain on your business. Let’s take a look at some of the things that you can do.
1. Invest in an accountant
Spending your hard earned cash on an accountant may seem like a step in the wrong direction. After all, you’re trying to save money, not spend it. However, if you get your accounting wrong, the mistake could be far more costly than the expense of an accountant.
Not only that, but accountants are the experts when it comes to business finances. Your accountant will be able to identify any tax breaks that you could take advantage of, as well as ensuring that you’re claiming all possible expenses, keeping your tax bill as low as possible.
2. Plan ahead
When you start a new business and your turnover begins to increase, it can be tempting to spend that money as soon as it comes in. Whether you’re spending the money on developing your business further or drawing a salary for yourself, it can be difficult to simply leave your hard earned cash sitting there in your business bank account.
However, it’s important to plan ahead when it comes to tax, otherwise you may be left facing a hefty bill. The best way to plan for this is to put a percentage of your monthly turnover into a separate bank account, ready to hand over to HMRC when the time comes.
If you aren’t sure what percentage of your turnover you should be putting aside for tax purposes, it’s worth consulting with an accountant. They can give you professional advice, helping you to avoid any costly mistakes.
3. Speak up
Don’t suffer in silence if you find that your business is beginning to struggle. Ignoring the problem is one of the worst things you can do, as it is only likely to get worse unless a solution is found.
The best thing you can do if your business is struggling is to consult with an accountant. They can take a look at your business’ finances and help you to find a way forward, minimising any debts and increasing your profit margins.
If you are hit with an unexpected tax bill that you are unable to pay, you should never ignore it. HMRC have a Time to Pay scheme that can enable you to pay your tax bill in instalments, providing you are judged to be a viable business.
Whatever the issue, the best thing to do is always to speak up and seek assistance, whether that’s from an accountant or HMRC. Don’t suffer in silence as it could result in the end of your business.
Is it worth going VAT registered?
There are both advantages and disadvantages of registering your business for VAT voluntarily, and the pros and cons need to be carefully weighed up before you rush into a decision. Whilst being VAT registered means that you will be able to claim back VAT on your business purchases, it also means that you will need to begin charging your own customers VAT, increasing your prices and resulting in extra admin. However, if your business turnover exceeds £85,000, the decision will be taken out of your hands, as it becomes compulsory to register for VAT at this point.
Is it bad to be VAT registered?
There are both pros and cons of being VAT registered, so it is impossible to say that it is inherently good or bad to be registered for VAT. If your sales are mainly to other businesses, you may benefit from being VAT registered, as you will be able to claim VAT relief on your own business purchases, whilst your clients can claim back the VAT that they pay to your business. However, if you sell mainly to retail customers who can’t claim back VAT, you may find that your customers are put off by the extra VAT charge and begin to look for alternatives.
To VAT or not to VAT – that is the question
There’s no denying that running a business is hard work, and that means taking some difficult decisions on occasion. VAT is one of those decisions, as there are both pros and cons to being VAT registered.
As a new start up company, it’s often worth holding off on registering for VAT whilst you figure out exactly who you will be selling to and how much turnover you will be generating. However, for more established businesses, the decision to be VAT registered may be unavoidable, as your turnover may exceed the VAT registration threshold.
If you’re unsure about whether your business should be VAT registered, it’s always worth seeking advise from an accountant or financial advisor. They will be able to advise you based on your individual circumstances, ensuring that you choose the right path for your business.
However, if you find that VAT is resulting in your business struggling and find yourself Googling “being VAT registered is killing my business”, you may have a difficult decision to make. In this situation, you can choose to either reduce your turnover to below the VAT threshold and deregister for VAT, or reconsider your business model to maximise profitability and ensure the survival of your business.