Contents
Key Takeaway
- VAT stands for Value-added tax, a tax mainly charged to consumers that is added to products or services during the production and distribution stages.
- The VAT threshold is that the total taxable turnover exceeds £90,000.
- VAT schemes are schemes that give you different options to pass on the VAT to the government.
- VAT costs can be minimised through several means, such as reclaiming all eligible VAT, utilising the appropriate VAT schemes, making use of bad-debt relief claims, and strategically timing large purchases.
Taxes are an essential part of operating a business anywhere in the world. Taxes are a mandatory contribution to the government in the form of monetary value. Taxes are levied on individuals, businesses, and products to help fund government infrastructure, economic development, and community services. One such tax is the Value Added Tax (VAT), also known as the Goods and Services Tax (GST). This is a multi-layered tax charged on the stages of production and distribution of a company.
This guide will walk you through the basics of VAT, what it is, how it works, VAT thresholds, schemes, and tips to minimise VAT costs. If you’re a small to medium-sized business, this article will help you save money on your VAT tax costs and help your business get to where it should be faster.
VAT: What is it? How Does it Work?
How does VAT work? Value-added tax (VAT), also known as the Goods and Services Tax (GST), is an unavoidable checkpoint for every business owner. Value-added tax is a tax that generally applies to goods and services. Value-added tax is charged whenever a value is added to the product or services. Businesses are responsible for collecting these taxes from consumers and forwarding them to the proper authorities. As an SME, abiding by the laws in a country is the right thing to do, and learning about the tax is also a requirement to make sure you remain in compliance with the government.
Once a foreign business owner starts business activities after the first taxable transaction, they are immediately required to register to collect VAT from consumers. Numerous factors influence the collection obligation, and different countries have varying perspectives on them. Some countries base it on the type of product sold and the status of the buyer, whether an ordinary consumer or a business, that commits theft.
As a VAT registered business, there are several responsibilities you must take on, Such as:
- Charge VAT on the goods and services you provide correctly.
- The UK has a 3-stage tax rate:
- Standard rate: 20% of the product price, applicable to most products and services.
- Reduced rate at 5% of the product, which mainly includes products for safety
- Zero rate at 0%, which mainly applies to necessities.
- A business must keep records of the VAT it collects and remits to the government.
- Pay the outstanding VAT to HMRC every quarter.
VAT Threshold and Schemes
You are required to register for VAT if the total taxable turnover is more than £90,000. If the taxable income is less than £90,000, you may opt to cancel the VAT registration. Selling goods from the UK to consumers in the EU also requires VAT registration if total sales exceed £8,818. Knowing the registration and threshold will be crucial to save up on costs.
Besides knowing the threshold, knowing the available VAT schemes is also a game-changer, and you can maximise the leverage provided by these schemes so you won’t have to pay a single dollar more than you have to. Below are the schemes availableon how to reduce VAT bill:
The Cash Accounting Scheme
The cash accounting scheme works by paying VAT only when a customer pays you. This scheme is beneficial if your client pays slowly, which allows you to retain more cash until payment is made.
The Flat Rate Scheme
The flat rate scheme works by paying a fixed percentage of your annual turnover, rather than extracting VAT from each transaction, which can be time-consuming. This scheme is particularly beneficial for businesses with low VAT costs.
The Annual Accounting Scheme
VAT returns are a quarterly requirement by the government. The annual accounting scheme allows you to pay a fixed amount throughout the year based on your estimated VAT liability. Once this has been done, you can proceed with one final balancing payment to even out if your estimates are too low or too high. This enables businesses to manage their cash flow more effectively.
5 Tips on How to Minimise VAT Costs
- Make use of the right VAT schemes
– His Majesty’s Revenue and Customs (HMRC) offers different schemes for businesses to adapt to better suit their business nature and operations. A business is not required to stick to the Standard VAT Scheme. Choosing the right scheme for your business boosts its efficiency.
- Reclaim all VATs that are reclaimable.
– It is in your best interest to keep track of all your business expenses to be able to see what expenses are eligible for VAT reclaim to decrease overall VAT costs. Here are some items that are VAT-deductible:
- Home office cost
- Mileage on company car
- Business equipment
- Office supplies
- Expenses from business-related travel
- Bad debt relief claim
– Bad debts are debts that a customer wasn’t able to pay within a specific time period. If you have previously paid the VAT on behalf of the debt, you may reclaim the VAT you have already paid to HMRC. Though you are still required to repay the VAT if the customers pay the debt in the future.
- Understanding what expense is VAT claimable
– Most expenses that most businesses get confused with are those that are VAT claimable. Entertaining customers is not VAT-deductible, but entertaining staff is VAT-deductible. Examples of this include Christmas or Halloween parties. Provided that it is solely for company personnel and not a gathering including other irrelevant people.
- Purchase with strategic timing
– Timing your purchases strategically can help you save up on VAT costs. For example, if you plan to purchase a large quantity of office supplies, you can time that big purchase to coincide with the quarter when your sales are at their lowest, which means the VAT will likely be lower as well. This will help you increase the reclaimable VAT and reduce your overall VAT costs. This may offset the VAT costs.
Frequently Asked Questions about collection of personal data
VAT stands for Value-added tax, a tax mainly charged to consumers that is added to products or services during the production and distribution stages.
VAT costs can be minimised through several means, such as reclaiming all eligible VAT, utilising the appropriate VAT schemes, making use of bad-debt relief claims, and strategically timing large purchases.
You must charge once your total taxable turnover exceeds £90,000. This makes you surpass the VAT threshold.
4. How can I avoid paying VAT?
You can maintain your turnover below £90,000. But once it exceeds the threshold, you can only minimise the VAT; you cannot avoid paying it.
