VAT for the Self-Employed

VAT stands for Value-Added Tax. There are three VAT rates in Britain each of which applies to different kinds of goods or services. These are the standard rate, currently 15%, the low rate, currently 5%, and the zero rate, which speaks for itself.

Do You Need to Register for VAT?

When you’re just starting up in business, you need to think about whether you have to register for VAT, and, if not, whether you might want to anyway. You are required by law to register for VAT if your turnover for the year (excluding special goods and services which are exempt from VAT) is above the threshold value. This value will normally be updated each year so it’s always best to check the HM Revenue website to find out what the latest figure is. In 2014, the threshold is £81,000. You are also required to register for VAT if your total turnover within the next 30 days is expected to exceed the threshold value.

Keeping VAT records for each transaction your business engages in can be somewhat burdensome. To make this a little easier, the government introduced a simplified VAT scheme especially for small businesses (those whose total yearly turnover is less than the qualifying amount, currently £187,000 including VAT). This is called the Flat Rate VAT scheme. Under this scheme, rather than accounting for each transaction, you just pay a flat rate percentage of your total turnover in tax to the government to cover your VAT obligations. The rate charged varies depending on the nature of your business. For example, IT consultancies pay a flat rate of 13% while travel agencies pay only 9%.

VAT Registration on a Voluntary Basis

In your first year of operation, there’s a good chance that your turnover won’t reach the threshold value. But you can optionally register for VAT anyway. Why would you want to do this? Well, if the VAT you pay on your business inputs is greater than the VAT you are charging on your business outputs, the government will refund you the difference. Whether registering voluntarily for VAT is economically beneficial for you or not will vary significantly depending on the nature of the income and expenditures your business has. It’s probably best to consult an accountant for advice on this issue.

Another advantage of registering is that some businesses will also refuse to deal with you if you are not registered for VAT because it means they can’t claim from the government on any goods or services they purchase from you.

Of course, once registered, you will need to charge VAT on your own sales. That means either raising the prices you charge customers or lowering your pre-VAT prices proportionately. If you deal primarily with other businesses, this shouldn’t be too much of an issue for you because they can reclaim the money from the government.

VAT Returns Once You’ve Registered

Normally, once you’ve registered for VAT, you will submit quarterly VAT returns. There are a few possible exceptions to this. You can ask for it to be done on a monthly rather than quarterly basis. You can also apply for the annual scheme under which you make contributions to your VAT bill periodically throughout the year but only submit detailed accounts once per year and either give or receive a balancing payment after that. The Cash Accounting scheme is one other option. Under this, you only need to account for VAT transactions to the government once your customers have paid you and once you have paid your suppliers.

VAT can be one of the most confusing topics for new business owners and it’s not hard to see why. There is often doubt about which rates apply to certain goods and services, what the exemptions are, whether to register at all, which scheme a business should join and how payments should be made. One bright spot is that you can get free advice from the government itself any time you need to by calling 0845 010 9000. Once you register for VAT, you may also have the option of attending local seminars or one-to-one advice sessions.