Self-employed businesses have to negotiate VAT while running their business on a daily basis. As a business owner, you are involved in everything including VAT obligations. This is crucial and you have to know what is VAT and how it works.
What is VAT?
VAT is a Value Added Tax that the government charges on the sales and purchase of goods and services. It is one of the most widely received taxes by the UK government.
An important thing to know is whether your business needs VAT registration or not. You should know where you stand to avoid penalties.
Does your business need VAT registration?
Your business needs VAT registration if:
- Its turnover is more than the current VAT threshold which is £85,000 in 2019/2020
- You are set to cross this threshold in next 30 days
Once you register you have to:
- Charge 20% VAT rate on the sale of the goods and the services you offer
- Pay VAT on the goods you purchase
- Submit VAT return every quarter
Benefits as a VAT Registered Business
Business owners generally feel uncomfortable while dealing with VAT. But VAT has its benefits. Many businesses will have to deal with only VAT-registered businesses, which means more options. If your business is VAT-registered, it brings more credibility. VAT number is displayed on your invoices makes it more trustworthy and professional. You can also claim some essential VAT expenses like accountancy fee and equipment charges.
The Right VAT Scheme for You
Choosing the right VAT scheme for your business is important and it depends on the nature of your business. As a business owner, you have to choose the best VAT mechanism.
Flat Rate Scheme
You can choose this scheme if your business has an annual revenue of up to £150,000. You have to pay some amount to the HMRC that makes the percentage of your turnover. Different rates are applicable for different industries and you can pick the sector and use that rate.
This scheme is suitable for freelancers, contractors and SMEs. This scheme does not allow claiming back on any purchases.
Standard Rate Scheme
You can reclaim VAT on eligible products by choosing this scheme. This is the most widely used option. This option works for many businesses. This is the mandatory option for VAT-registered businesses with an income of more than £85,000.
As a company owner, it’s your responsibility to send a quarterly VAT return to HMRC. Under this scheme, you can operate freely as you will have the option of reclaiming VAT that you pay for goods and services to other businesses.