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4 questions on VAT for small businesses

You don’t need to be a financial guru to run your own business, much less an accountant. You do, however, need to know a few of the basics. Zervant have put together this guide on VAT, to help you better understand your business tax obligations. What is VAT? Why do you need it? What options are available? Read this guide and get to grips with VAT.

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What is VAT and how does it work?

VAT was introduced back in 1973 as a way for the government to generate additional revenue. It applies to all “taxable supplies”, including the sale of goods and services.

If you’re VAT registered, then you need to add VAT to everything you sell (also known as “Output VAT”). There are different rates for different goods and services, which you can check on HMRC’s dedicated website. This “Output VAT” needs to be paid to the government.

However when you buy goods or services from other businesses, you can claim back the VAT they charge you on your purchases (also known as “Input VAT”).
So in reality, to save double the work, a VAT registered company calculates its “Output VAT” minus the “Input VAT” and this is the figure you pay the government.


Do I need to register for VAT?

If your annual business turnover exceeds £82,000 then you have to register (large penalties apply if you don’t). If you’re under the threshold it’s by no means mandatory, though it could well save you money in the long run. From a company image perspective, it may be preferable to register. If you don’t you’re essentially advertising the fact that your turnover is under £82,000.

What are the different VAT schemes for small business?

There are 3 alternative schemes suited to small business, each with their own pros and cons.

First off is the flat rate scheme, where VAT payments are calculated as a fixed percentage of your total turnover. You can find out the percentage that applies to your business here. It’s a simple, practical scheme, but is for businesses with a maximum turnover of £150,000.

The next option is the cash accounting scheme. VAT returns are based on when money for purchases or sales physically changes hands, not the date stated on invoices. This is a good scheme if you use cash accounting. Otherwise you risk paying VAT on sales you’ve not yet been paid for (as is the case with the flat rate scheme!).

The third alternative for small businesses is the annual accounting scheme. You do one VAT return a year, whereas with the other 2 schemes you do so once a quarter. Based on the figures in this annual return, you then make monthly payments in the following year. These start in month 4 and continue until month 12, a total of 9 payments. There is a balancing payment in month 14.

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If you’re able to sync your annual VAT return with your financial year, you’ll avoid additional paperwork too. And spreading the payments out will help with budgeting and financial forecasting. To be eligible for the scheme you need a maximum annual turnover of £1.35 million.

What’s the link between Zervant, VAT, and small business?

Whatever VAT scheme you choose it’s essential you have crystal clear visibility of all the money going in and out of your business. Which is where Zervant’s online invoicing software comes in!

You’ll be able to see what’s been paid and what hasn’t. You can even create invoices in under 30 seconds. All at the click of a button. Because even if “death and taxes” are unavoidable, they needn’t be impossibly hard.

See for yourself with a free 30 day trial.

John Hills

John Hills

Marketing Manager at Zervant
Zervant provides online invoicing software for over 90,000 small business owners, sole traders and freelancers throughout the UK and Europe.
John Hills