Home Tax & Legal The great VAT myth: Why planning for it in advance is important

The great VAT myth: Why planning for it in advance is important

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A business owner, Nick Whitemore states that when you plan to build your start-up above the VAT turnover threshold, register from the start. In regards to this topic of VAT, there are several discussions that proceed be it among friends, family members or even with business owners. Different people think that this is just a by-product of a successful business. What most of the people say is that customers pay the VAT and not the business owner? But according to many experienced business people, that’s very far from reality. Value added tax is the tax that applies to almost everything that you buy in the UK in the shops or online. Whether it is new or second-hand goods both have VAT included although there are some special cases.

VAT: Real Talk

Most of the entrepreneurs out there that struggle to improve their businesses cannot stop to think about the growth of their businesses in a very great way. Thus, as the company grows so do its revenue increases too and with increased revenue comes the possibility of your business being required to register to Value added tax. Currently within the UK and EU, companies with a turnover of £81,000 of your total sales or more in a span of 12 months basis, it’s mandatory to sign for VAT. To be absolutely clear on this, one is required to register first at this juncture so that they can charge VAT. No exclusion or evasion is allowed even though your business might be providing services and products that are VAT exempted, as long as you hit the turnover threshold you have to register for payment of the Value added tax. Furthermore, it doesn’t matter if you’re a sole trader, limited company or if you are trading under any legal business entity, once you reach the turnover threshold you have to register for value added tax. Other businesses prefer to register for Value added tax as they start-up immediately. This can turn out to be a good move since many suppliers and B2B companies in the market can’t take a look twice at your business if you aren’t VAT registered. There are several reasons why a business owner decides to register VAT immediately after start up but it also implies that your business is going to be there for a very long period of time.

Plan for VAT immediately you start your business

Most of the entrepreneurs and small business start-ups fail to plan properly for value added tax. What they think of their business is that VAT will never have an impact on them, but they are very wrong about it. Almost every entrepreneur who is aggressive and wants to grow big will reach the VAT turnover threshold within a short time. Every business to consumer outlets and other businesses such as shops, tradesmen, and online stores among others are required to show prices including VAT to customers. For instance, if a customer purchases a product worth £12, what most of the people don’t know is that £2of that amount goes directly to the HMRC, which represents VAT charged at 20%. Business owners who don’t plan for VAT in advance when they are about to charge it, they hit a big dilemma. What does business owners do, do they alienate a huge number of customers through charging a further 20% on retail prices? Or do they include VAT into profit margins by reducing them significantly. It’s very clear that charging VAT has its own disadvantages that all business owners require to know of. In case you’re not registered for VAT yet and you’re trading on small margins of 1% to 20% net profit, all your margins could be consumed should you register for value added tax. Despite operating on a healthy margin at present, when you decide to embrace VAT into those margins, you will be required to sell 20% more to meet the same net profit at the end of the day. Is it possible for your business to stand tall even after a 20% reduction in net profit overnight? When you hit the turnover limit, VAT is no longer optional but a must to pay for.

What are the exceptions?

There are several exceptions when it comes to VAT registration. For instance, if you sell business to business services and products you will be less probably affected by VAT registration. Most of the medium and large businesses out there are VAT registered so that they can recover the value added tax charged on top of current prices. It’s not always about the bad but to be more real how many businesses supply trade? Definitely, not a big percentage of the small businesses in the UK fall under it. The information that brings slight hope is the fact that VAT turnover limit is slowly increasing. When VAT was first incepted in 1973, the VAT turnover limit was just at £5,000 and it later rose to £25,400 in the year 1990, by the year 2,000 it was at £52,000 and currently it stands at £81,000. Great news is the fact that all turnovers from within the EU are VAT taxable. If you have a company with a turnover of £100,000 every year but you only take £50,000 in sales from the European Union, there is no need to register for VAT. If you have registered your business for VAT, you are allowed to recollect every VAT that you pay. This includes stock, computers or other businesses purchases. In addition, you can be given a little VAT refund from the VAT man when your net VAT outlay is more than the VAT sum that you gathered for that specific quarter.

If you don’t prepare, failure is on your way.

When you start your business, have in mind that you will have to register for VAT someday. Strategies in preparation for VAT registration for example is by setting your margins high such as at 30% so that when you register for VAT you’re able to remain with a margin of 10% after paying for it. Since the VAT charges 20% of your margins, what you’re required to do when registering for VAT is to arise a bit your margins so that you make something after it is cut. Due to stiff competition from competitors, a 5% increase sounds reasonable especially for Business to consumer (B2C) environment. The increments can be increased drastically until you reach at 20-30% margins once more.  If your budget is okay, you can always hire an accountant to manage your financial side of the business. Accountants can provide great advice in regards to VAT registration and they can direct you through the process and furthermore, check on your behalf VAT returns. On the other hand, if you cannot afford the services of an accountant, then it’s important to book a one-off meeting just to ensure that you’re attaining goals in terms of VAT and overall bookkeeping. If you’ve a low budget that can’t hire an accountant, HMRC’S website has all the details you could ever want to know regarding VAT. While charging VAT, it can turn out to be a huge surprise for your business if you don’t take the necessary steps as you get closer to hitting the VAT threshold. Whether you can afford an accountant or not, consider checking out VAT registration today and start planning in advance so that when your business grows and hits the VAT threshold you will be safe.