Tax & admin · 25 October 2021

What to do when being VAT registered is killing your business

Being VAT registered is killing my businessAs 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.

Disadvantages of being VAT registered

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

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