VAT – a banana skin for small businesses?

Value Added Tax (VAT) can often feel like a slippery banana skin for many businesses; it’s complex, guidance changes frequently and it’s hard to get definitive answers to your particular question. Missteps in managing VAT can lead to serious financial and legal consequences, not to mention affecting your cash flow.  But it needn’t be a slip hazard if you follow some simple steps. In this blog, we aim to peel back the layers of VAT and provide clear, practical guidance to help you avoid common pitfalls. 

1. Understand VAT Registration Thresholds

• Registration Requirement: The threshold increased in April this year. If your business's taxable turnover exceeds £90,000 in a 12-month period, you must register for VAT Keep a close eye on your turnover to avoid missing this threshold.
• Voluntary Registration: Even if your turnover is below the threshold, consider voluntary registration. It can allow you to reclaim VAT on business expenses and might enhance your business's credibility.

2. Understand the Different Schemes

• Would the Flat Rate Scheme be more suited to your business? Or maybe Cash Accounting?

3. Know the Different VAT Rates

• Make sure you’re applying the correct rate to your transactions.

4. Good Record-Keeping 

• Invest in accounting software that will help you keep detailed records of purchases and sales and comply with HMRC’s Making Tax Digital requirements. 
• Submit VAT returns on time and pay on time to avoid fines and penalties!

5. Maximise Your VAT Reclaims 

• Input VAT: You can reclaim VAT paid on business-related goods and services. Ensure you have proper VAT invoices to support your claims.
• Partial Exemption: If your business supplies both taxable and exempt goods/services, you may need to calculate how much VAT you can reclaim.

6. Stay Informed

• Seek professional advice
• Legislation Changes: VAT rules can change, so stay informed about any updates or changes in legislation that may affect your business.  

7. Manage Cash Flow

• VAT Liabilities: Plan for VAT payments to avoid cash flow problems. Consider setting aside the VAT collected in a separate account to ensure funds are available when needed.
• Deferred Payments: In certain circumstances, you may be able to arrange deferred payments with HMRC if facing temporary cash flow issues.

Go bananas with our VAT Challenge Quiz! If you feel you might take a tumble, then talk to The Smart Finance Team about how we can help your business become Top Banana. 

Question 1

What scheme allows small businesses with a VAT turnover of £150,000 or less to pay VAT as a percentage of their turnover? 

1. Flat Rate Scheme
2. Annual Accounting Scheme
3. Cash Accounting Scheme
4. Standard Scheme  

Answer: A

Question 2

What is the key difference between zero-rated and exempt goods/services in the context of UK VAT?

1. Zero-rated goods/services are charged VAT at 0%, while exempt goods/services are not subject to VAT at all.
2. Businesses can reclaim VAT on purchases related to zero-rated goods/services but cannot reclaim VAT on purchases related to exempt goods/services.
3. Zero-rated goods/services still require VAT registration, whereas businesses dealing only in exempt goods/services do not need to register for VAT.
4. All of the above.   

Answer: D

Question 3

Which of the following is an exempt supply for VAT purposes? 

1. Advertising services
2. Banking and financial services
3. Legal services
4. IT consulting

Answer: B

Question 4

What is the Cash Accounting Scheme?

1. A method where VAT is accounted for on the date of invoice 
2. A scheme where VAT is accounted for on the basis of cash received and paid 
3. A special rate of VAT for cash transactions 
4. A VAT exemption for cash-only businesses

Answer: B

Question 5

If a business is not VAT registered, should it charge VAT on its sales?

1. Yes
2. No

Answer: B

Our top tips for managing your VAT responsibilities

• Seek Professional Advice if you are unsure
• Invest in Accounting Software
• Know which VAT scheme is right for your business
• Stay Informed
• Keep Detailed Records
• Plan for VAT Payments

Image by Vectorportal.com, CC BY