Whether you bake biscuits or make products or provide a service, your responsibility is collecting the VAT on your service or product and then paying it to HM Revenue and Customs (HMRC).
That is unless it happens to be a Jaffa Cake, which infamously has been classified as a VAT-free cake, rather than a luxury biscuit.
Needing to charge VAT after reaching the registration threshold can significantly impact your competitiveness, particularly if you are a production, manufacturing or retail company. As a startup company, it is definitely worth thinking about when you are going to have to add VAT since it will either force your retail/wholesale price up or eat into your profit margins. Consider the following example:
You launch a widget business and you are able to purchase widgets for £9 each and sell them for £12. This £3 profit margin provides your company with a competitive edge compared to your competition when you first start out, however when you reach the registration point, you will either then to:
Maintain a £12 selling price, and have to pay the HMRC £2 for VAT, leaving you with a net selling price of just £10 and profit margin of £1, or
You raise your selling price up to £14.40 (£12 + VAT), to keep your £3 profit margin, but because you have increased your selling price to £14.40 it results in your losing your competitive edge.
Therefore, it is worth carefully thinking about if and when it is the right time to register for VAT.
When will my startup have to start paying VAT?
When it reaches £83k. That is, whenever your startup’s turnover reaches £83k, you are required to register with HMRC for VAT and start to collect and pay this tax on your eligible services or products.
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Now that you have committed that magic number to memory, the following are some useful tips to help ensure that your startup is prepared for VAT:
Keep a close watch on your turnover – review your turnover on a regular basis (if you use cloud accounting software this is easy to do) and check to see how closely your sales are to getting you to the £83k amount. When you start getting close, start to plan ahead of time to pay VAT.
Do financial housekeeping – this will really help to ensure that your financial process works in an efficient manner and provide you with the necessary numbers. If you have messy accounting make sure to clean it up and provide your finances with a good spring cleaning so that you are prepared.
Register early – just as soon as you begin to approach £75-£80k turnover, you should get registered for VAT. This registration process takes about two weeks, so the sooner you get started, the more prepared you will be to complete the additional administration required by VAT.
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Plan for the quarterly VAT payments – Each quarter your startup company will be responsible to pay VAT to the HMRC. Therefore, it is a good idea to have a separate VAT deposit account and integrate those payments every quarter into your cash flow and budgeting.
You are able to register for VAT before you reach the £83k figure. There are some startup companies that register for VAT early on in order to provide their brand with some extra recognition and give the impression that they are a larger concern.
When you register from the very beginning, it shows prospective investors and customers that you are very serious about growing your business and are a serious player in your market. Just consider the potential impact that paying VAT can have and how it may affect your margins and cash flow.
If you are not resident in the UK, then please check out this non resident VAT guide.
How hard is to get VAT set up?
It isn’t all that complicated to register for VAT. You can do it yourself if you have a financial background. However, it can be valuable to get your accountant involved in the process from the very start.
People tend to get nervous with anything that relates to the HMRC, so when you work closely with a VAT specialist it can help to remove concerns and free your time up so you can focus on growing your young startup company.
There are various accounting methods for VAT. Your accountant can help you come up with the best method for your specific startup to use.
Accrual accounting – with this method you pay VAT based on purchase or invoice date. So if your customer is invoiced in one VAT period, but you are not paid until the following quarter, you will need to pay the VAT in the earlier time period.
Problem with cash flow – if your invoices are not paid on time, your debt will start to add up and you may end up having cash flow problems when your VAT is due to be paid.
Cash accounting – this method helps to simplify the VAT process. As a small business, you may apply to HMRC for permission to use cash accounting (your turnover must be less than £1.35m). When the cash accounting method is used, you only account for VAT after you have received payment, not from the date that you sent the invoice – which eliminates potential cash flow problems.
Flat-rate scheme – if you want VAT to be even easier, it is also possible to apply to use the flat-rate scheme. With this method, you keep charging VAT at the same relevant rates. However, when you pay the HMRC, you just a simple flat rate for everything. This helps to simplify your bookkeeping system, you pay for VAT, and allows you to reinvest more money into your business for growth.
VAT doesn’t have to be taxing
There you go. As you can see, VAT really isn’t as scary as you might have thought. As long as you have the proper professional advice, forward planning, and knowledge, you can get VAT to work for your new business – and also improve your annual profits and cash flow.
Here are the top 3 actions you should take:
Make the switch to cloud accounting and watch closely when you start to get near the £83k turnover point.
Plan your tax expenses and save your VAT so that you are prepared to pay it every quarter.
Speak with an accountant and make sure the best accounting method that suits the needs of your startup company.