If you’re a small business owner then the issue of VAT is likely to be nagging at the back of your mind, like an annoying itch that just won’t go away. Unfortunately, the only way to scratch that itch is to deal with it head on, but confusion around VAT can make this seem like a big task for another day…and another…and another.
The fact is that VAT needs to be given thought and consideration as early on in your business as possible. While you may be tied up with more pressing matters, like building a client base, initially, the ultimate goal for any business is to grow, and to do that you need to understand and plan for your VAT obligations.
The Magic Number
The threshold for paying VAT, which is a type of tax on goods and services that is paid to the government, is currently £79,000. This figure can seem a long way off to a fledgling business, but, with your fundamental business aim being to grow to maximum profitability, it’s a milestone that you should be hoping, and aiming, to reach as soon as possible.
If your company mainly deals with businesses then VAT doesn’t have to be an issue. If they are VAT registered then they can claim back the VAT charged to them, as can you, meaning the profit margins will essentially remain the same.
If you sell directly to customers then you may find the VAT hurdle a little trickier to get over. This is where foreplanning comes in. Once you’ve set your prices, it’s very difficult to increase them while still retaining your core customer base. However, with an additional 20% to find for your VAT, and no prior prep, you may be pushed into a corner.
The smart business owner plans for VAT registration from day one, setting prices accordingly or making sure that VAT can be absorbed by company profits.
The Flat Rate Scheme
The flat rate scheme is good news for many small businesses, with a turnover of up to £150,000. It’s an optional scheme, but the sums could work in your favour. This scheme involves paying a flat rate of VAT on all transactions, from 4 to 14.5% depending on your industry. It means that you can’t claim back VAT on purchases, but pay a lower flat rate of VAT than the standard 20%. It’s a money-saving option for service based businesses who make few purchases. In fact, registering for the flat rate scheme can actually boost your business profits, as you are still able to charge the 20% to your clients and customers, and then pay the reduced figure on to HMRC.
There’s a lot to think about when starting up a new business, but thinking about VAT shouldn’t be something that you save for a distant day in the future. Just as you need to arrange professional indemnity insurance cover from your very first invoicable job or transaction, you shouldn’t skip over the issue of VAT.
Market-leaders Hiscox offer indemnity insurance, so it’s easy to tick that off of your new business tasks list. Then turn your attention to VAT, to make sure that your business is able to grow and thrive without obstacle.