Hmmmm… VAT. It’s confusing for many self-employed, contractors and small business owners. But the sooner you understand HMRC’s VAT rules the better it will be for your business! Careful financial planning throughout the year will reduce the shock factor when your VAT bill arrives. However, there’s no denying that settling your VAT bill will severely reduce your cash flow and bank balance!
When should I register for VAT?
It is widely thought that people running their own Limited company can register for VAT. But did you know it’s open to sole traders too? (be aware that your VAT debt will also be considered a personal debt that will be subject to potential seizure of assets and/or a winding up petition!). You can volunteer to register for VAT, but you MUST legally register for VAT within 30 days of meeting any of these criteria:
Your VAT-taxable turnover (the total of all sales that aren’t exempt from VAT) exceeds the current threshold of £85,000 within a 12-month period (on a rolling basis)
You expect your VAT-taxable turnover to exceed the threshold in a single 30-day period
You only sell goods or services that are exempt from VAT, but you purchase goods to use in your business to the value of more than the threshold from VAT-registered suppliers in the EU
What are the penalties?
You will incur penalties if you fail to register your business for VAT, hold inadequate records, deliberately evade tax or commit fraud. Also, interest will be charged if you pay late. Being unable to pay your VAT bill can be an indication that either your business is under-performing or that you haven’t devised a financial strategy to deal with it.
What if I can’t pay?
Being unable to pay isn't always because you haven’t saved for it. Poor sales or unforeseen costs can have the potential to wipe out any funds that you have put aside for tax. But don’t stick your head in the sand! Contact HM Revenue and Customs (HMRC) as soon as possible - you might be able to set up a payment plan to pay in instalments.
If you are having difficulty paying before the deadline, call the Business Payment Support Service and discuss your reasons for not paying, what you can do to pay it, how you can make an immediate payment, and estimate how long it will take to pay the balance.
Business Payment Support Service Telephone: 0300 200 3835 Monday to Friday, 8am to 8pm Saturday and Sunday, 8am to 4pm
Justifiable confusion can come if you have a complicated VAT rules so if you are in any doubt at all, enrol help from you accountant or bookkeeper
Another option is to take out a tax bill loan - these are short term unsecured business loans, where payments are spread out over time to help you to stay in control of your cash flow and ease financial strain on your business.
So how can I budget successfully to avoid a surprise?
The best way to budget for your VAT bill is to predict your end of year sales and purchases. If you regularly review this figure against your profit and loss account, you will be able to identify how much your tax liability might be.
Regular bookkeeping can help you work out your VAT liability enabling you to set aside an appropriate amount every month. If you have a regular monthly income, then set aside a fixed sum and allocate it for your tax. However, if you receive irregular sums, then it’s probably best to assign a percentage of it instead.
A careful mix of planning ahead, ensuring there is money in the business and finance options can help your business cope with any surprise VAT bill. If you require any further information pop over to https://www.gov.uk/vat-returns or call 0300 200 3700