VAT, or Value Added Tax to give it its full moniker, can be a pain in the back side (just an opinion, not a fact).
Why is it a pain?
- HMRC expect you to know the rules, and punish you when you get them wrong
- You usually have to complete a quarterly return, on time
- You are not paid to be an unofficial collector and administrator of taxes
If you provide services or sell goods that could have VAT added to you're retail price, you have two options;
1) You can wait to register for VAT when you expect to exceed the 12 months sales threshold (the current threshold is £78,000 from 6th April 2012). This is compulsory registration.
2) You can register voluntarily, even before you reach the 12 month sales threshold.
What happens if you do not register in time?
HMRC will walk into your office and shut you down for non-compliance! Not actually true, but the real punishment may be just as bad.
You will be requested to pay HMRC the VAT on the invoices since the date that you should have been registered. So, if the rate of VAT on the goods or services is 20% and the invoices raised total £100,000, VAT due to HMRC will total £20,000.
HMRC will not care how you get the money to them. You can ask your clients to pay the VAT that they should have paid at the time by issuing a VAT only invoice. Alternatively you can fund the liability out of your own working capital. The risks of both of these approaches should be fairly obvious.
What are the pros and cons of voluntarily registering for VAT?
· Being VAT registered can make your company appear bigger than it actually is
· You will be able to reclaim any VAT incurred on valid business expenses
· You will become familiar with the rigours of VAT reporting and cash management before you are forced to.
· Depending on the scheme you choose or are entitled to, you may actually make money simply from being VAT registered.
· The administrative burden can, at first, be overwhelming
· Quarterly reporting can expose your business to compliance risk as the rules governing VAT are not the easiest to understand……………….to say the least!
Want to discuss further?
If you are concerned that you may need to be registered for VAT and haven’t done so yet, then please do not hesitate to contact us. We would be happy to provide some brief and free advice on your situation and can highlight the solutions.
Alternately, if you would discuss whether registering voluntarily would be benefit your business, we would be happy to guide you through the process or take care of it for you.
About Howell James
A member of the Institute of Chartered Accountants and Director of Howell James Chartered Accountants.
We aim to help small and medium size businesses with their compliance and advisory needs.
We not only work with limited companies, sole traders, partnerships, but also work closely with those looking to start a business, in particular, advising on which business structure to trade through.
If you would like an initital fee consultation, please do not hesitate to contact us:
+44 (0) 20 7193 4760